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The dividend tax credit is a provision in the Canadian tax code that reduces the amount of tax citizens must pay on the dividends they receive from Canadian businesses. Typically, taxpayers receive either an eligible dividend or a non-eligible dividend, depending on the type of corporation issuing the dividend. The dividend tax credit is slightly different for each type of dividend, but it usually is equal to the amount of the dividend. The tax credits were put in place by the Canadian government to prevent double taxation.
Dividends are payments made by a company to its shareholders. The payments are a portion of the earnings made by the company. Usually, this is a cash payment, but in some circumstances, dividends may include stock or property.
Most companies offer dividends to their shareholders as a compensation for stock prices that are stagnant. Usually, the dividend is quoted as a dollar amount per share. The dividend can also be a percentage of the current market price, which is commonly termed dividend yield.
In Canada, there are two types of dividends. Canadian public corporations, which are companies that offer shares of stock on the Canadian stock exchange, give eligible dividends to their share holders. Canadian-controlled private corporations, companies that don't offer stock, give non-eligible dividends to their investors.
Both eligible and non-eligible dividends are taxed by the government. In most cases the dividend tax imposed on individuals is actually a second tax on the same money earned by the company. The first tax is imposed on the company's revenue, before dividends are paid out. This is referred to as double taxation.
To eliminate double taxation, a dividend tax credit was established. The dividend tax credit is a dollar amount given to taxpayers when they receive a dividend payment from a Canadian company. The dividend tax credit will offset the tax that the government will collect for the dividend payment.
The dividend tax credit is non-refundable, which means that the government won't issue a check if there is zero tax liability. In other words, if the amount of taxes owed by a person is less than zero as a result of the dividend tax credit, the government won't send the balance. Instead, the person will not pay any taxes that year.
As a result of the dividend tax credit, the effective tax rate on dividends has decreased. This increases the number of investors willing to invest in a Canadian company. The rate is about three to 30 percent, depending on income and the tax bracket.