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Updated 2mo ago.
Updated 2mo ago.
The dividend tax credit is a Canadian tax benefit that reduces the tax paid on eligible dividends received from Canadian corporations. This mechanism is designed to avoid double taxation: the company has already paid tax on its profits before distributing them to shareholders.
If you receive $1,000 in eligible dividends from VDY.TO (which holds Canadian banks and companies), you must first "gross up" this amount to $1,380 for tax calculation purposes. Then you apply the federal dividend tax credit (15.02% of the grossed-up dividend) and the provincial credit. The effective tax rate on these dividends ends up well below your ordinary marginal rate.
In a taxable account, eligible dividends from Canadian corporations are taxed much more favorably than employment income or interest. A Quebec resident with $50,000 in income pays roughly 6-7% effective tax on eligible dividends vs. 37-40% on interest income. This is why Canadian equity ETFs are sometimes preferred in taxable accounts.