DIVIDEND TAX CREDITS

The dividend tax credit (line 40425 federally) offsets the corporate tax already paid on profits distributed as dividends. It is the core of "integration," the principle that income should bear about the same total tax whether earned directly or through a Canadian corporation.

GROSS-UP AND CREDIT

• Eligible dividends (generally paid by public companies and from private company income taxed at the general corporate rate): grossed up by 38 percent. Federal credit 15.0198 percent of the grossed-up amount; Ontario credit 10 percent.

• Non-eligible (other than eligible) dividends (from small business income taxed at the lower rate): grossed up by 15 percent. Federal credit 9.0301 percent of the grossed-up amount; Ontario credit 2.9863 percent for 2026, falling to 1.9863 percent in 2027.

SIDE EFFECTS OF THE GROSS-UP

• The grossed-up amount (not the actual dividend) is included in net income, which can increase the OAS clawback and reduce income-tested benefits such as the age amount.

• The credit is non-refundable, so excess credit is wasted if there is no tax to offset.

• Foreign dividends receive no gross-up or dividend tax credit; they are fully taxed with a foreign tax credit for withholding.

• Dividends received by a spouse may be transferred to the other spouse if it allows the spouse amount to be claimed or increased.