The Dividend Tax Credit: How Dividends Are Taxed in Canada

How are dividends taxed in Canada?

Dividends are taxed in two steps. First, the cash dividend is “grossed up” to approximate the pre-tax profit the corporation earned, and that larger figure is included in your income. Second, you get a non-refundable credit for tax the corporation is presumed to have paid already. The CRA’s line 12000 page sets out the gross-up for anyone without a slip: multiply eligible dividends by 138% and other-than-eligible dividends by 115%.

The federal credit is set in section 121 of the Income Tax Act as a fraction of the gross-up: 6/11 for eligible dividends and 9/13 for other dividends. Expressed against the grossed-up amount that is 15.0198% and 9.0301%. Provinces add their own dividend tax credits, which vary, so the combined rate depends on where you lived on December 31.

Eligible dividends vs other-than-eligible dividends

Under subsection 89(1) of the Income Tax Act, an eligible dividend is a taxable dividend received by a Canadian resident from a Canadian-resident corporation that the corporation designates as eligible under subsection 89(14). Dividends that are not designated are other-than-eligible (often called non-eligible) dividends. You do not have to work this out yourself: the slip puts each type in separate boxes.

Your slips do the arithmetic. On a T5, box 25 is the taxable amount of eligible dividends and box 26 the federal credit; box 11 and box 12 are the same figures for other-than-eligible dividends. Trusts, including mutual fund trusts, report on T3 slips (taxable amounts in box 50 for eligible and box 32 for other dividends), employee profit-sharing plans on T4PS slips (boxes 31 and 25) and partnerships on T5013 slips (boxes 133 and 130). Add the taxable amounts of both types on line 12000, enter the other-than-eligible part again on line 12010, and enter the total credit from the slips on line 40425.

Worked example: $40,000 of dividends vs interest (federal tax, 2026)

Take someone with no other income who receives $40,000 in 2026. Using the 2026 federal brackets and the $16,452 basic personal amount, $40,000 of interest produces about $3,297 of federal tax. The same amount of eligible dividends is grossed up to $55,200, but the $8,291 credit wipes out the federal tax: $0. As other-than-eligible dividends it becomes $46,000 of income with a $4,154 credit, leaving no federal tax either.

Federal basic tax stays at zero up to roughly $80,700 of eligible dividends for a person with no other income. That is a federal-only result: provincial tax still applies at levels that differ by province, and large dividend income can trigger the alternative minimum tax, so check line 41700 when your dividends are high.

How to report dividends on your return, step by step

Most investors never do the gross-up by hand, because the slips already show the taxable amount and the credit. The CRA’s line 12000 and line 40425 instructions come down to these steps:

• Collect every T5, T3, T4PS and T5013 slip for the year from banks, brokers, mutual fund companies and partnerships.
• Add the taxable amounts of eligible and other-than-eligible dividends and enter the total on line 12000.
• Enter the taxable amount of other-than-eligible dividends again on line 12010, so the CRA can apply the right credit rate.
• If you received a dividend without a slip, multiply eligible dividends by 138% and other dividends by 115%, and use the line 40425 chart on the Federal Worksheet for the credit.
• Enter the federal credit from the slips on line 40425, and the provincial or territorial credit on line 61520 of your Form 428 (Quebec residents follow Revenu Québec’s rules).
• Keep the slips; do not send them with an electronically filed return.

Hidden costs of the gross-up

Because the grossed-up figure, not the cash, is what goes into net income, dividends push up income-tested clawbacks more than the cash suggests. A retiree with $75,000 of eligible dividends reports $103,500 of net income. Against the 2026 OAS recovery threshold of $95,323, that triggers about $1,227 of OAS recovery tax at 15%, even though actual cash received was below the threshold.

The same applies to the Canada child benefit, the Canada Groceries and Essentials Benefit (the former GST/HST credit) and the age amount, all of which are reduced as net income rises. The dividend tax credit itself is non-refundable: if your tax is already zero, unused credit is lost, and it cannot be transferred to a spouse except by electing to report all of a spouse’s dividends when that increases your spouse amount.

Dividends in an RRSP, TFSA or from foreign companies

Dividends earned inside an RRSP, RRIF or TFSA are not reported on your return and get no dividend tax credit. RRSP withdrawals are taxed as ordinary income regardless of whether the money came from dividends, interest or gains, which is why many investors keep Canadian dividend payers in non-registered accounts where the credit is available.

Dividends from foreign corporations, such as US shares, do not qualify for the credit; the CRA states that foreign dividends are excluded, so they get no gross-up and no credit and are taxed much like interest. If the cost of your foreign shares held outside registered plans tops $100,000 at any time in the year, you also have to file Form T1135.