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Eligible Dividends in Canada

An eligible dividend is any dividend that a Canadian resident receives from a designated corporation. A corporation’s capacity for paying dividends depends on its status.

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Designation of Eligible Dividends

Corporations are responsible for designating every eligible dividend that they pay. After doing so, they have to provide written notification to the shareholders of the same. This is a requirement as per subsection 89(14) of the Income Tax Act.

Notifications

Shareholders of a corporation could be notified about an eligible dividend by:

  • Letters
  • Dividend cheque stubs
  • If the shareholders are directors as well, a notation in the minutes

For public corporations, if all the dividends are eligible, a designation should be made stating the same. Notice of designation can be provided in the following ways:

  • On the website of the company
  • In the quarterly or annual reports
  • In publications for the shareholders

The website notice is valid until it’s removed. Likewise, any notice in the quarterly or annual reports is valid for that period only. A press release is also sufficient proof that the shareholders have been given notification.

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Personal Income Tax

Reporting Eligible Dividends

While reporting dividends on your tax return, you need to fill in the lines 12000, 12010, 12100, and 22100 on your form. You’ll enter the amounts in the corresponding boxes as shown on the slips T3, T4PS, T5, and T5013.

If you haven’t received your slips, then you can calculate the amount on the eligible dividend by multiplying the actual amount by 138%.

Dividend Tax Credit

Only individuals, not corporations, are eligible for a dividend tax credit. It’s the amount against one’s tax liability on the gross total of dividends received by a corporation. These tax credits are federal and provincial. The tax credit amount is arrived at by calculating a percentage of the gross amount. This percentage is set by the Canadian Revenue Agency.

These are non-refundable credits that are granted to counterbalance any double taxing. This isn’t applied to any dividends received from a foreign company. A dividend-paying stock can, therefore, result in a hefty tax break on other income.

Conclusion

Investing in Canadian dividends is going to save you money. Of course, it depends on other factors, like your income. For moderate-income individuals, the returns are better as compared to higher-level incomes.

For information on the calculations, please visit: https://taxpage.com/articles-and-tips/dividend-gross-up/

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