If you’re a shareholder of a Canadian corporation, you will receive a T5, Statement of Investment, which documents your dividend income. If you’re an employee entitled to the company’s shares, your dividend income will be on T4PS, Statement of Employee Profit-sharing Plan Allocations & Payments. Either way, you need to report your dividend income and claim commensurate credits for tax deduction.
Federal dividend tax credit is a non-refundable credit that deduct the tax you owe. It’s a means of subsidy that avoids double taxation. Given how the corporation from which you receive your dividend has already paid tax on it, you’re exempt from tax obligations on that which was paid.
There are two types of dividends: eligible and other than eligible dividends. Corporations that pay by higher tax rates can designate their dividends as eligible. This means that your dividend is taxed at a higher rate, resulting in a higher tax credit. On the contrary, corporations that pay by lower tax rates can issue other than eligible dividends. As a result, your dividend is subject to a lower tax credit. The tax credit is by 15.0198% for eligible dividend, and 9.0301% for the other.
In addition, you need to report your grossed-up dividend income. That is, the actual amount you receive as your dividend plus the estimated tax for which the corporation has already paid on the amount you receive.
For 2020 tax year, the gross-up rate is respectively 38% and 15% for eligible dividends and other than eligible dividends.
e.g. you have a total dividend of $200, $100 is eligible. The grossed-up, taxable amount of eligible dividend is: $100 x 1.38 = $138, whereas the taxable amount of other than eligible dividend is $100 x 1.15=$115. You need to claim $253 and report the amount on line 12000 in your T1.
As for deduction, you should claim the tax credit designate for both eligible and other than eligible dividend on line 40425. That is, $138 x 15.0198%=$20.73 of tax credit for eligible dividend, and $115 x 9.0301% = $10.38 for other than eligible dividend.
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