How are dividends taxed at the personal level in Canada?

Dividends from Canadian corporations are not dropped straight onto your return at your marginal rate. They are grossed up, and then a dividend tax credit takes off part of the tax. The point of the machinery is integration: the personal credit roughly recognizes tax the corporation already paid.

Two kinds, and a common mix-up

Eligible dividends generally come from income taxed at the general corporate rate — many public-company dividends, and a private company’s income above the small-business limit. The federal gross-up on eligible dividends is 38%.

Non-eligible dividends generally come from income taxed at the small-business rate. The federal gross-up is 15%. They are not “the ones that missed the small-business rate.” It is the other way around. A CCPC paying you from active income inside the small-business limit is usually paying a non-eligible dividend.

Your T5 shows the actual dividend, the taxable (grossed-up) amount, and the federal dividend tax credit. Ontario has its own credit on top. The taxable amount, not the cash, is what sits in your income and can affect benefits.

Why owners still mix salary and dividends

Salary creates RRSP room and CPP pensionable earnings, and it is a deduction to the company. Dividends do not create RRSP room and are not deductible, but they avoid CPP. Neither is automatically cheaper. It depends on profit, what you need to live on, and whether the company will retain the rest. We run that before year-end, not in April.