The dividend tax credit
Deduction for dividends from taxable Canadian corporations
Section 121 provides a federal dividend tax credit that reduces tax on Canadian dividends to account for corporate tax already paid on the income — the core of the dividend integration system.
Plain-language explanation
Section 121 completes the dividend integration mechanism started by s.82 (gross-up). After you include the grossed-up dividend in your income, s.121 provides a credit against your federal tax.
Federal DTC rates for 2026: - Eligible dividends: 15.02% of the grossed-up amount (or 20.73% of the cash dividend) - Non-eligible dividends: 9.03% of the grossed-up amount (or 10.38% of the cash dividend)
Why this matters: The gross-up + DTC system is designed so that, in theory, the total tax (corporate + personal) on business income paid out as dividends equals the tax an individual would have paid earning that income directly. In practice, the integration is imperfect — eligible dividends integrate better (public corps pay a higher corporate rate), while non-eligible dividends from small businesses overshoot integration in some provinces.
Provincial dividend tax credits are added on top of the federal credit. Combined federal + provincial DTCs make eligible dividends particularly tax-efficient at moderate personal incomes.
Example
Karin receives $5,000 in eligible dividends. Grossed-up amount: $5,000 × 1.38 = $6,900. Federal DTC: $6,900 × 15.02% = $1,036. Her income inclusion is $6,900 but her actual credit reduces tax by $1,036.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Two-tier dividend tax credit introduced alongside the eligible dividend designation. Eligible dividends (from public corps and large CCPCs) receive a higher federal DTC of 15.02% of the grossed-up amount; non-eligible dividends receive 9.03%.
Before
Uniform 13.33% DTC on all Canadian dividends
After
Two-tier DTC: 15.02% for eligible dividends, 9.03% for non-eligible dividends (rates at 2026 levels)
Non-eligible dividend DTC rate reduced from 11.02% to 10.03% and subsequently to 9.03% by 2019, tracking the reduction in the small business tax rate. DTC must approximate corporate tax paid to maintain integration.
Before
Non-eligible DTC: 11.02% of grossed-up amount (2013)
After
Non-eligible DTC: 9.03% of grossed-up amount (2019 and on)
Common questions
What is the dividend tax credit rate in 2026? +
Federal DTC is 15.02% of the grossed-up amount for eligible dividends, and 9.03% for non-eligible dividends. Each province has its own additional DTC applied against provincial tax.
Why is there a dividend tax credit? +
To avoid double taxation. Dividends come from after-tax corporate profits. The gross-up (s.82) inflates the income to estimate the pre-tax amount; the DTC (s.121) credits back an approximation of the corporate tax paid. Combined, the system attempts to tax the dividend income at the same rate as if earned directly.
Is there a provincial dividend tax credit too? +
Yes. Each province provides its own DTC applied against provincial income tax. Rates vary significantly. Ontario's eligible DTC is 10% of the grossed-up amount; Alberta's is 8.12%.
Key terms
Related sections
Related calculators
Related guides
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 121. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.