Canadian dividends are grossed up (inflated) on your tax return, then you receive a dividend tax credit (DTC) that offsets most or all of the additional tax. The net effect is that eligible dividends (from public corporations) are taxed at a significantly lower rate than interest income — and at zero or even negative rates for lower-income Canadians. Foreign dividends get none of this treatment.
Why Canada Has a Dividend Gross-Up System
When a Canadian corporation earns $100 of profit, it pays corporate income tax first — roughly 15% federally for large corporations or 9% for small CCPCs on the first $500,000 of active business income. The remainder is paid out as a dividend to shareholders, who must also pay personal income tax on it.
Without any adjustment, this would result in double taxation: once at the corporate level and once at the personal level. The gross-up and dividend tax credit (DTC) system attempts to correct for this by:
- Grossing up the dividend amount (adding back an estimate of the corporate tax already paid)
- Taxing you on the grossed-up amount (as if you earned the pre-tax corporate profit)
- Giving you a dividend tax credit (representing the corporate tax already paid)
The goal is tax integration: ideally, the combined corporate plus personal tax should equal what a person would have paid if they had earned the income directly.
Eligible vs. Non-Eligible Dividends
Canada has two categories of dividends with different gross-ups and tax credits:
- Eligible dividends: Paid by public corporations (e.g., banks, utilities, large TSX-listed companies) and by CCPCs on income taxed at the general (higher) corporate rate. Gross-up: 38%. Federal DTC: 15.0198% of the grossed-up amount.
- Non-eligible (ineligible) dividends: Paid by CCPCs from small business income taxed at the small business rate. Gross-up: 15%. Federal DTC: 9.0301% of the grossed-up amount.
Your T5 slip from your broker will indicate which type each dividend payment falls into. Box 24 shows eligible dividends, Box 25 shows the eligible dividend gross-up amount. Box 10 shows non-eligible dividends with Box 11 for the non-eligible gross-up.
How the Calculation Works (Eligible Dividends, Ontario)
Let us work through a step-by-step example for an Ontario resident with $50,000 of other income who receives $10,000 in eligible dividends in 2025.
- Actual dividend received: $10,000
- Gross-up (38%): $3,800
- Taxable (grossed-up) amount: $13,800 (added to net income)
- Federal tax on $13,800 at 20.5% marginal rate: $2,829
- Federal DTC (15.0198% × $13,800): $2,073
- Net federal tax: $2,829 − $2,073 = $756
- Ontario provincial tax and provincial DTC are calculated separately and also reduce the effective rate
The combined federal + Ontario effective rate on the actual $10,000 dividend (at this income level) is approximately 6–9%, compared to ~32% on the same amount of interest income.
Comparing After-Tax Income: $1,000 at Various Income Levels (Ontario, 2025)
The table below shows the approximate after-tax amount retained from $1,000 of different income types in Ontario for 2025. These are estimates based on combined federal + Ontario marginal rates.
| Income Level (Other Income) | $1,000 Interest (After Tax) |
$1,000 Capital Gains (After Tax on $500 inclusion) |
$1,000 Eligible Dividend (After Tax) |
$1,000 Non-Eligible Dividend (After Tax) |
|---|---|---|---|---|
| $30,000 (low income) | $800 | $900 | $1,000+ | $960 |
| $60,000 (middle income) | $676 | $838 | $908 | $822 |
| $100,000 (upper-middle) | $567 | $783 | $802 | $737 |
| $150,000 (high income) | $536 | $768 | $751 | $710 |
| $220,000+ (top bracket) | $470 | $735 | $711 | $673 |
Note: "Capital gains" row shows after-tax amount on the full $1,000 gain (with 50% inclusion). Eligible dividends can exceed $1,000 at low income because the DTC can eliminate all tax and generate a refund if you have little other income. Figures are approximations for Ontario residents.
How Foreign Dividends Are Taxed
Foreign dividends (from US stocks, European companies, international ETFs distributing foreign income) are fully taxable as regular income in Canada. There is no gross-up and no Canadian dividend tax credit. A $1,000 US dividend is simply added to your income at 100% and taxed at your marginal rate.
Foreign withholding taxes (e.g., the standard 15% US withholding on dividends paid to Canadians) may be claimed as a foreign tax credit using Form T2209, which reduces your Canadian tax dollar-for-dollar but only up to the Canadian tax otherwise payable on that foreign income. To maximize the foreign tax credit on US dividends, holding US dividend stocks in your RRSP is often preferred (the Canada-US treaty exempts RRSP accounts from US withholding).
Reporting Dividends on Your T1
Your financial institution sends a T5 Statement of Investment Income slip each February. For eligible dividends, report the grossed-up amount (actual dividend plus 38% gross-up) on line 12000. For non-eligible dividends, report the grossed-up amount on line 12010. Your tax software then calculates and applies the dividend tax credits automatically on Schedule 1 (federal) and the provincial equivalent.
If you did not receive a T5 (for example, if dividends were less than $50 for the year), you are still legally required to report the income. Track dividends in your brokerage account statements.
Dividends Inside Corporations (CCPC Context)
Business owners who hold investments inside a Canadian-Controlled Private Corporation (CCPC) face a different dividend dynamic. When the corporation pays dividends to you as a shareholder, those dividends are classified as eligible or non-eligible based on whether they come from the corporation's General Rate Income Pool (GRIP, fed at general corporate rates) or Refundable Dividend Tax on Hand (RDTOH, associated with small business income and passive investment income).
CCPCs also have access to a dividend refund mechanism: when the corporation pays dividends, a portion of refundable tax held in the RDTOH account is refunded to the corporation (at a rate of 38.33 cents per dollar of non-eligible dividends paid). This makes the integration system work even within the corporate structure.
See Your Dividend Tax in Real Numbers
Use the Tax Friend calculator to enter your dividend income alongside your other income sources and see your exact combined federal and Ontario tax — including the dividend tax credit applied.
Frequently Asked Questions
Why are Canadian dividends grossed up for tax purposes?
The gross-up compensates for the fact that Canadian corporations already paid corporate tax on their earnings before paying dividends. By grossing up the dividend and then providing a dividend tax credit, Canada's tax system attempts to ensure the total tax on corporate earnings plus personal dividend income equals what would have been paid if the income had been earned directly by the individual. This is called tax integration.
Where do I report dividends on my Canadian tax return?
Report eligible dividends (grossed-up) on line 12000 and non-eligible dividends (grossed-up) on line 12010 of your T1 return. Your broker or corporation will send a T5 slip showing the actual dividend amount paid and the grossed-up amount to report. Tax software calculates the dividend tax credit automatically.
Are foreign dividends eligible for the Canadian dividend tax credit?
No. Foreign dividends (from US stocks, international ETFs, etc.) are fully taxable as regular income and do not qualify for the Canadian dividend gross-up or dividend tax credit system. Foreign withholding taxes may be credited against Canadian tax using Form T2209, and holding US dividend-paying stocks in an RRSP can avoid US withholding entirely under the Canada-US tax treaty.
At what income level do eligible dividends become more tax-efficient than capital gains?
In Ontario, eligible dividends are more tax-efficient than capital gains at income levels below approximately $100,000–$110,000. Above that range, capital gains tend to have a lower effective rate because the grossed-up dividend amount pushes more income into higher brackets. For top-bracket Ontario taxpayers (above $220,000), eligible dividends are taxed at about 39.3% and capital gains at about 26.8% on the $500 inclusion per $1,000 of gain.