Understanding Dividend Income in Canada

For a lot of people who have recently shifted to Canada, understanding the concept of dividend income seems cumbersome, and they wonder how it is tax-free. But if you understand how dividend income is taxed in Canada, it will help you make better financial decisions. 
Here is a simple guide that highlights the rules in simple language to help you know what exactly dividend income is and how it is tax-free in Canada.

The first question that people ask is – How is dividend income tax-free? The answer depends on various factors, including your total taxable income, province of residence, and the type of dividend you receive.

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What are Dividends?

Dividends are payments that a person receives as a shareholder of a corporation. There are mainly two types of dividends –

• Eligible (usually they are from large public corporations)
• Non-eligible (they are from small Canadian private corporations)

As per the guidelines of the Canada Revenue Agency (CRA), you are required to report all your dividends, even if you believe that a part of those dividends is tax-free.

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So why do some dividends feel tax-free?

Canada uses a gross-up and dividend tax credit (DTC) system. This is an efficient system that prevents double taxation (once at the corporate level and once at the personal level). Because of this credit system, many low-income taxpayers end up paying little to no tax on dividends, especially eligible dividends.

Eligible dividends benefit from a gross-up of 38%, while non-eligible dividends are grossed up by 15%. A dividend tax credit (DTC) is applied after gross-up. For the year 2025, the federal rate for eligible dividends is 15.0198% and 9.0301% on the grossed-up non-eligible dividend.

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How much dividend income can become tax-free?

As mentioned above, many Canadians pay little to zero federal tax on eligible dividends. It is also possible that when the total income is low, the dividend tax credit may reduce taxes to zero or even make you eligible for a refund.

The factors on which the amount of tax-free dividend income depends are –

• Your employment income
• Pension or RRSP withdrawals
• Investment income
• The province you live in
• Whether dividends are eligible or non-eligible

Get in touch with the expert team at Taxccount Canada to know more about dividend income in Canada.

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When does dividend income become tax-free?

As per the rules of the Dividend Tax Credit (DTC), a part of your dividend income may become tax-free, especially if you have little or no income.

As per the Mesa CPA guidelines, if your only source of income is dividends, you can receive $30,000–$35,000 in non-eligible dividends without paying federal taxes.

KPMG data for 2024–2025 shows that the amount of non-eligible dividend income received at the federal level is about $34,313.

These thresholds vary based on your province of residence. Each province in Canada has its own dividend tax credit rate and tax brackets. So, you need to be careful. Getting help from a professional, like Taxccount Canada, is highly recommended.

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Why Some Dividend Income Is More “Tax-Free” Than Others

There are a few factors that add up to make a portion of your dividend income tax-free, and they are –

Gross-up and Dividend Tax Credit

The gross-up increases the taxable dividend, but the DTC provides a credit to exempt that tax, reflecting that the corporate tax is already paid.

Integration

A lot of people don’t know that the Canadian tax system is designed to integrate corporate and personal tax seamlessly via an effective mechanism. This way, you are not taxed twice for the same earnings.

Basic Personal Amount

Every Canadian taxpayer has a non-refundable credit (it is called the basic personal amount). If your total income is low, your dividend income combined with the dividend tax credit may not generate any tax.

Provincial Credits

Did you know that in addition to the federal DTC, you can also claim provincial dividend tax credits? This will further reduce your tax liability.

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Tips to Maximize Your Dividend Income

Sharing some effective tips to help you maximize your tax-efficient dividend income.

Optimize dividend type

We encourage our clients to pay eligible dividends (if available from their corporations), as they have more generous tax credits.

Balance your salary and dividends

Use your salary and dividend income wisely to stay within the ‘tax-efficient band’.

Use registered accounts

Try and hold dividend-paying investments in a TFSA or RRSP. Dividends in TFSA are completely tax-free, and in RRSPs, they are tax-deferred.

Estimate provincial effects

Keep in mind that provincial tax credits can differ, so make sure to run your projections and find an accurate tax-free dividend.

Consult a professional

If you are a business owner or a high-net-worth individual, we recommend you consult a tax professional to align your dividend income with your overall tax planning. Get in touch with Taxccount Canada for the best-in-class services.

This is general information only and not professional advice. Consult a professional before acting.