Don’t be afraid of dividend tax rules

Dividend tax rules have changed recently and BMO Nesbitt Burns offers a useful refresher on some of the more important points to keep in mind.

Read: Dividends still best for business owner

Ineligible Dividends Tax Rate: Canadian dividends received that are not eligible dividends are still subject to a 25-per-cent gross-up and a 13.33% credit mechanism. Beginning in 2014, changes originating from the 2013 Federal Budget will increase the effective tax rate on these ineligible dividends by adjusting the gross-up from 25 to 18% and the corresponding dividend tax credit from 13.33% to 11.02%.

Marginal Tax Rate: The top tax rate for eligible dividends varies significantly by province and territory. In Alberta and Yukon, despite the impact of these recent federal changes, eligible dividends incur a lower top tax rate than capital gains in 2013. Notably, the tax rate differential between eligible dividends and capital gains has widened in Manitoba, Ontario, Quebec, Nova Scotia, P.E.I. and Nunavut.

Gross-up of Eligible Dividend Income: For individuals in lower marginal tax brackets, the impact on the calculation of their taxable income from the dividend gross-up can negatively affect income-tested benefits and tax credits, such as Old Age Security (OAS), Guaranteed Income Supplements (GIS) and other provincial benefits.

“Tax-free” Dividend Amounts: The dividend tax credit can provide effective tax rates for individuals in lower marginal tax brackets. Therefore, individuals with no other source of revenue can receive significant amounts of dividend income without incurring any income tax.

Also read:

Effects of new dividend tax rules

Dividend tax changes outrage Que.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.