What is dividend income? How does a dividend tax credit work?
Dividends are paid on shares and mutual funds at rates that tend to be lower than interest rates. Dividend income from foreign corporations is fully taxed. Canadian corporations pay tax on profits before distributing dividends to shareholders and so their dividends are taxed at a lower rate to reflect this. To calculate your dividend tax credit “boost up” your dividend income by 25 per cent to arrive at what Revenue Canada calls your dividend income (Yes, it can get confusing). According to the federal dividend tax credit, you are then entitled to a credit of 2/3 of the “boosted up” dividend income.
