Tax-Free Dividends: A Practical Guide for Maximising Your Savings in Canada

Do you know as a couple, you can receive $108,790 tax-free?

Well, if I tell you that as a couple, you can receive up to $108,790 (or $54,395 as a single) without paying any tax, will you be surprised?? But this is true! Canada is not all about paying high taxes. By smartly doing tax and retirement planning, you can save a lot of taxes legally.

Here I am talking about the dividend, tax-free dividends.

Let me explain!

Under the Canadian tax system, if you receive a dividend of $100 (called an actual dividend), it will be grossed up and included in your tax return as $138 (called a taxable dividend). To offset that additional income included in your tax return (which you never receive), the Income Tax Act (ITA) provides a dividend tax credit of 15.0198% (Federal dividend credit) and 10% (Ontario dividend credit).

So, the dividend tax credit coupled with the basic personal credit offset the tax rate applicable to low-income brackets applicable on this income. As a result, there is no net tax payable up to this level of income. When your income increases your marginal tax slab will increase, however, the credit amount will not change. Therefore, at a higher level of income, dividends are not fully tax-free.

It is an important tax planning and retirement planning strategy to build a portfolio of securities (stocks) that regularly and consistently pay dividends since it is treated favorably by the tax rules.

To get this result:-

1. You must not have any other income. You will still be paying Ontario Health Premium, which is not a tax but is collected through a personal tax return.
2. Dividends must be eligible dividends.

What are eligible dividends?

Eligible dividends are typically paid out by public corporations, from income that has been taxed at a higher corporate tax rate. Non-eligible dividends (or “other than eligible” dividends) are generally paid out by private corporations from income that has been taxed at a lower corporate tax rate.

You can also achieve the same result with the non-eligible dividends (or “other than eligible” dividends), but the amount of the tax-free dividend will be lower i.e. $31,450. The reason is that non-eligible dividends are paid by a private corporation which is taxed at a lower rate. Therefore, these non-eligible dividends qualify for a lower dividend tax credit i.e. 9.0301% (as compared to 15.0198% eligible dividend).

In any case, whether you receive an eligible dividend or a non-eligible (other than eligible) dividend, you can receive a sizable income without paying any taxes, and in other cases, you receive dividend income by paying low taxes by effective tax planning.

However, every person or business’s tax situation is different. There can not be a general tax planning strategy. Therefore, a specific plan needs to be prepared for each situation. A good retirement plan should get you ready to meet your pre- and post-retirement goals. But planning must start now.

Our experienced team at Source Accounting Professional Corporation can guide you in tax planning as per your personal needs. Call us at 647-930-8130 or reach us at info@sourceaccounting.ca.

Source Accounting Professional Corporation (CPA) is a full-service accounting firm in Mississauga, helping business and corporation owners, professionals, investors, commercial real estate agents, real estate brokers, and property managers by providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. If you are looking for an accountant Mississauga (Brampton, Toronto, GTA) or an accountancy firm Brampton, you are in the right place.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.