The Canadian dividend tax credit (DTC) reduces personal income tax on dividends received from taxable Canadian corporations. The credit compensates for corporate income tax already paid on the profits distributed as dividends, reducing the effective personal tax rate on dividend income relative to other income types. The gross-up and credit system is Canada’s mechanism for integrating corporate and personal tax on dividend income.
Quick Answer
For eligible dividends (paid from income taxed at the general corporate rate), the federal dividend tax credit for 2025 is 15.0198% of the grossed-up dividend. For ineligible dividends (paid from income taxed at the small business rate), the federal DTC is 9.0301% of the grossed-up dividend. At low income levels, the DTC can produce a negative effective tax rate on eligible dividends — meaning you receive money back from the government net of the DTC.
How the Dividend Tax Credit Works
Step 1 — Gross-up: The actual dividend received is grossed up before being included in income.
– Eligible dividend: actual dividend x 1.38 (38% gross-up)
– Ineligible dividend: actual dividend x 1.15 (15% gross-up)
Step 2 — Include in income: The grossed-up amount is added to other income and taxed at your marginal rate.
Step 3 — Apply the DTC: Subtract the federal DTC from federal tax owing.
– Eligible federal DTC = grossed-up dividend x 15.0198%
– Ineligible federal DTC = grossed-up dividend x 9.0301%
Step 4 — Apply provincial DTC: Each province has its own DTC rate applied against provincial tax.
Effective Tax Rates on Dividends (Ontario, 2025)
| Income Level | Eligible Dividend Effective Rate | Ineligible Dividend Effective Rate | Regular Income Rate |
|---|---|---|---|
| $50,000 | -6.86% | 8.92% | 29.65% |
| $75,000 | -0.28% | 16.45% | 33.89% |
| $100,000 | 8.33% | 22.66% | 43.41% |
| $150,000 | 24.34% | 36.93% | 46.41% |
| $250,000 | 39.34% | 47.74% | 53.53% |
Negative effective rates reflect over-integration at low income levels — the DTC exceeds the personal tax on the grossed-up dividend.
Eligible vs Ineligible Dividends
Eligible dividends are paid by Canadian public corporations or CCPCs that have designated the dividend as eligible — typically from active business income taxed at the general corporate rate (not the small business rate). Most dividends from TSX-listed corporations are eligible. Eligible dividends on T5 slips are in box 24 (eligible dividend amount) and box 25 (dividend tax credit for eligible dividends).
Ineligible dividends are paid by CCPCs from income taxed at the small business rate, or from certain other sources. They appear in box 10 (actual amount of dividends) and box 11 (taxable amount) on T5 slips.
Verified Against Source
Dividend gross-up rates and DTC rates are set annually in the Income Tax Act: section 82 (gross-up), section 121 (DTC). The 2025 gross-up for eligible dividends is 38% (per ITA s.82(1)(b)) and for ineligible dividends is 15% (ITA s.82(1)(b.1)). Source: canada.ca/en/revenue-agency/services/tax/businesses/topics/completing-slips-summaries/financial-slips-summaries/return-investment-income-t5/t5-slip/t5-slip-amounts.html
Frequently asked questions
- What is the Canadian dividend tax credit?
- The dividend tax credit (DTC) is a non-refundable federal (and provincial) tax credit that reduces personal income tax on Canadian dividends. It compensates for corporate tax already paid on profits distributed as dividends. For eligible dividends, the federal DTC is 15.0198% of the grossed-up amount; for ineligible dividends, it is 9.0301% of the grossed-up amount.
- What is the gross-up on Canadian dividends?
- Before calculating tax, dividends are grossed up (increased) to approximate the pre-tax corporate income from which they were paid. For eligible dividends, multiply the actual dividend by 1.38 (38% gross-up). For ineligible dividends, multiply by 1.15 (15% gross-up). The grossed-up amount is included in income; the DTC offsets the extra tax this creates.
- What is the difference between eligible and ineligible dividends?
- Eligible dividends are paid from corporate income taxed at the general corporate rate (approximately 26.5% in Ontario) — most public company dividends and some CCPC dividends qualify. Ineligible dividends are paid from income taxed at the small business rate (approximately 12.2% in Ontario). The higher gross-up and DTC for eligible dividends reflects the higher corporate tax already paid.
- Why is the effective tax rate on dividends sometimes negative?
- At low income levels, the dividend tax credit can exceed the personal income tax calculated on the grossed-up dividend. This over-integration means the federal and provincial DTCs together more than offset the marginal tax on the dividend income. In Ontario at $50,000 total income, eligible dividends effectively generate a -6.86% tax rate — the government effectively subsidizes the investment income through the credit system.
- How do I report dividends on my T1 return?
- Enter the amounts from your T5 slip: for eligible dividends, use box 24 (actual amount) and box 25 (DTC). For ineligible dividends, use boxes 10 and 11. Schedule 4 of the T1 is where investment income including dividends is detailed. CRA’s Wealthsimple Tax, TurboTax, and other software automatically gross-up dividends and apply the DTC when you enter T5 information.
- Are foreign dividends eligible for the DTC?
- No. The dividend tax credit applies only to dividends from taxable Canadian corporations. Dividends received from foreign corporations (US, European, etc.) are included in income at the actual amount received (no gross-up) and receive no DTC. A foreign tax credit may be available for withholding tax deducted at source on foreign dividends.
- Do dividends count as earned income for RRSP purposes?
- No. Dividend income is investment income, not earned income. It does not generate RRSP contribution room. Only earned income (employment, self-employment, net rental) creates RRSP room. For high dividend investors focused on building RRSP room, earned income from a salary remains the necessary vehicle.
- Is the DTC refundable?
- The federal DTC is non-refundable — it can reduce federal tax to zero but cannot create a refund by itself. However, because of the gross-up mechanism, dividends can still indirectly reduce other credits (e.g., the age amount clawback) or increase the OAS clawback. Provincial DTCs are also non-refundable.
- How does the DTC affect OAS or GIS?
- The grossed-up dividend amount is included in net income (line 23600 of the T1). Higher net income reduces income-tested benefits and credits: OAS is clawed back at 15% above $95,323 (2025); GIS is reduced by investment income; the age amount phases out above $42,335. Investors relying on OAS and GIS should model the impact of dividend income on net income and resulting benefit clawbacks.
- Can I claim the DTC inside a TFSA or RRSP?
- No. The DTC only applies to dividends received outside registered accounts in a taxable (non-registered) account. Dividends received inside a TFSA, RRSP, RRIF, or RESP are not taxable to the investor — the DTC is irrelevant in these accounts. For investors with both registered and non-registered accounts, holding Canadian dividend-paying stocks in the non-registered account is often recommended to benefit from the DTC.
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