Understanding Foreign Dividends and Dividend Tax Credits in Canada

Dividends are a common type of investment income received by taxpayers. However, the tax treatment depends on whether the dividends are received from Canadian corporations or foreign corporations. Understanding these rules helps taxpayers accurately report income and claim available tax benefits.

Foreign Dividends: Reporting and Tax Treatment

Foreign dividends received by a taxpayer must be reported on line 12100 of the T1 Income Tax and Benefit Return. Unlike Canadian dividends, foreign dividends are not eligible for gross-up or dividend tax credits.

The actual amount received must be reported and converted into Canadian dollars. Foreign dividends are reported on Schedule 3. If foreign tax was withheld, the taxpayer may be eligible to claim a foreign tax credit under the Federal non-refundable tax credits section to help reduce double taxation.

Key Points About Foreign Dividends

Report the actual amount received from foreign dividends.
Convert foreign amounts into Canadian currency.
Foreign dividends do not qualify for gross-up or dividend tax credits.
A foreign tax credit may be available if foreign taxes were paid.

Stock Dividends and Stock Splits

A stock dividend occurs when a corporation issues additional shares instead of paying cash. Although no cash is received, the stock dividend may still be considered taxable income. The corporation reports the deemed and taxable amount on the T5 Information Slip, and the taxable amount must be included in the taxpayer’s income.

A stock split is different from a stock dividend. It increases the number of shares held by a shareholder without changing the company’s share capital. A stock split does not create any tax consequences, and the additional shares received are not taxable.

Understanding T5 Dividend Reporting

Canadian corporations issue T5 slips to report dividend payments. Important dividend-related boxes on the T5 slip include:

Box 24: Actual amount of eligible dividends
Box 25: Taxable amount of eligible dividends
Box 26: Dividend tax credit for eligible dividends
Box 10: Actual amount of dividends other than eligible dividends
Box 11: Taxable amount of dividends other than eligible dividends
Box 12: Federal dividend tax credit for other than eligible dividends

Eligible Dividends and Dividend Tax Credit

Eligible dividends received from Canadian corporations are subject to a gross-up and dividend tax credit system. The taxable amount of eligible dividends is calculated by multiplying the actual dividend amount by 138%. The additional 38% represents the gross-up amount.

The federal dividend tax credit for eligible dividends is calculated as 15.02% of the taxable amount and is claimed under the Federal non-refundable tax credits section.

For dividends other than eligible dividends, the taxable amount is calculated by multiplying the actual dividend by 115%. The federal dividend tax credit for these dividends is 9.0301% of the taxable amount.

Spousal Dividend Election

Under subsection 82(3) of the Income Tax Act, a taxpayer may include their spouse’s taxable dividend income from Canadian corporations on their own return if it helps increase the spousal amount claim.

The election applies only to dividends from taxable Canadian corporations.
All qualifying spouse dividends must be included; partial transfers are not allowed.
Foreign dividends cannot be transferred under this election.

Final Thoughts

Understanding the difference between foreign dividends, Canadian dividends, stock dividends, and stock splits helps taxpayers report investment income correctly and take advantage of available tax credits. While Canadian dividends may qualify for gross-up and dividend tax credits, foreign dividends follow different rules and may qualify for foreign tax credits when foreign taxes are paid.