Government proposes changes to financial institutions’ dividend deduction

By Mark Burgess | March 28, 2023 | Last updated on October 27, 2023
2 min read

The federal government is further targeting financial institutions, changing the tax treatment of dividends on Canadian shares so that they’re no longer exempt from business income.

The “dividend received deduction” allows corporations to claim a deduction on dividends received from shares of Canadian corporations, effectively excluding the dividends from income.

However, the government said the deduction conflicts with rules that require gains on mark-to-market property to be included in ordinary income.

“The tax treatment of dividends received by financial institutions on portfolio shares held in the ordinary course of their business is inconsistent with the tax treatment of gains on those shares under the mark-to-market rules,” the budget states.

The budget proposes to align the rules by denying the dividend received reduction for dividends received by financial institutions on shares that are mark-to-market property.

The measure would apply to dividends received after 2023. The government estimates the measure would bring in revenue of $3.15 billion over five years beginning in 2024-25.

The move comes after the Liberals brought in a surtax on banks and insurers of 1.5% for taxable income over $100 million. Banks and insurers also have to pay a one-time Canada Recovery Dividend: a 15% tax on the average of 2021 and 2020 taxable income above $1 billion, payable over five years beginning in the 2022 tax year.

The government also reiterated that a 2% proposed share buyback tax would apply as of Jan. 1, 2024, as previously announced in the fall economic statement. The tax will apply to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada, the 2023 budget said.

A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million, the budget said. The government estimated the measure would increase federal revenues by $2.5 billion over five years, starting in 2023-24.

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Mark Burgess

Mark was the managing editor of from 2017 to 2024.