The Canadian dividend tax credit reduces the tax citizens pay on dividends from Canadian companies. Eligible and non-eligible dividends are taxed differently, but the credit generally equals the amount of the dividend. The credit offsets the tax collected on the dividend payment, eliminating double taxation. The effective tax rate on dividends has decreased, increasing the number of investors willing to invest in Canadian companies.
The dividend tax credit is a provision of the Canadian tax code that reduces the amount of tax citizens must pay on dividends they receive from Canadian companies. Typically, taxpayers receive either an eligible dividend or a non-eligible dividend, depending on the type of corporation issuing the dividend. The dividend tax credit is slightly different for each type of dividend, but is generally equal to the amount of the dividend. Tax credits were established by the Canadian government to avoid double taxation.
Dividends are payments made by a company to its shareholders. Payments are a part of the profits made by the business. Usually this is a cash payment, but in some circumstances, dividends may include stocks or property.
Most companies offer dividends to their shareholders as compensation for stagnant stock prices. Typically, the dividend is quoted as a dollar amount per share. The dividend can also be a percentage of the current market price, which is commonly called the dividend yield.
In Canada, there are two types of dividends. Canadian public corporations, which are companies that offer shares on the Canadian stock exchange, grant eligible dividends to their holders of shares. Canadian-controlled private corporations, companies that do not offer shares, give ineligible dividends to their investors.
Eligible and non-eligible dividends are taxed by the government. In most cases, the dividend tax imposed on individuals is actually a second tax on the same money earned by the company. The first tax is applied to the income of the company, before paying dividends. This is known as double taxation.
To eliminate double taxation, a dividend tax credit was established. The dividend tax credit is a dollar amount awarded to taxpayers when they receive a dividend payment from a Canadian company. The dividend tax credit will offset the tax that the government will collect on the dividend payment.
The dividend tax credit is non-refundable, which means the government will not write a check if there is no zero tax liability. In other words, if the amount of taxes owed by a person is less than zero as a result of the dividend tax credit, the government will not send the balance. Instead, the person will not pay any tax that year.
As a result of the dividend tax credit, the effective tax rate on dividends has decreased. This increases the number of investors willing to invest in a Canadian company. The rate is approximately three to 30 percent, depending on income and tax bracket.
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