Dividend gross-up — why dividends look bigger than they are
Dividends received
Section 82 requires you to include a "grossed-up" amount of dividends in your income — more than the cash you received — to reflect the corporate tax already paid on that income.
Plain-language explanation
Section 82 is the starting point of the dividend integration system. When you receive a dividend from a Canadian corporation, you must include more than the cash amount in your income:
Eligible dividends (from public corporations and CCPCs that paid full corporate tax): gross-up is 38%. Receive $1,000, include $1,380 in income.
Non-eligible dividends (from most CCPCs that paid the low 9% small business rate): gross-up is 15%. Receive $1,000, include $1,150 in income.
Why the gross-up? Because dividends are paid from after-tax corporate income. To put all income on an equal footing, the Act "gross up" the dividend to estimate the pre-tax corporate income, then credits you for the corporate tax paid (the dividend tax credit under s.121). Done correctly, the integrated result equals the tax you would have paid if you earned the income directly.
The dividend tax credit (s.121) offsets the extra income inclusion. Eligible dividends get a 15.02% federal credit; non-eligible get 9.03%. Provincial credits vary.
In practice, eligible dividends are more tax-efficient than non-eligible dividends at moderate personal incomes, and both are more efficient than salary for income above certain thresholds — the exact crossover depends on province and personal income.
Example
Louis receives $10,000 in eligible dividends from a public company. He includes $13,800 ($10,000 × 1.38) in his income on Schedule 4. He then claims a $2,072 federal dividend tax credit ($13,800 × 15.02%) against his tax. The net tax on the $10,000 cash received is lower than if he'd earned $10,000 as salary.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Eligible dividend category created. Public corporations and CCPCs paying tax at the full corporate rate can now designate dividends as "eligible" with a 45% gross-up (later reduced to 38%). Eligible dividends receive a higher dividend tax credit, improving integration for income taxed at full corporate rates.
Before
All Canadian dividends had a 25% gross-up and uniform DTC rate
After
Two-tier system: eligible dividends (45% gross-up, higher DTC) vs. non-eligible dividends (25% gross-up)
Eligible dividend gross-up reduced from 45% to 38%. DTC rate adjusted correspondingly to maintain approximate integration with the corporate tax rate.
Before
Eligible dividend gross-up: 45%
After
Eligible dividend gross-up: 38%
Non-eligible dividend gross-up reduced from 18% to 17% in 2016, then further to 16% in 2018 and 15% in 2019, as the small business tax rate was reduced (gross-up tracks the small business rate to maintain integration).
Before
Non-eligible dividend gross-up: 25% (pre-2006), 18% (2009–2015)
After
Non-eligible dividend gross-up: 15% (2019 onwards)
Common questions
Why is the amount on my T5 slip different from what I received? +
T5 Box 11 (eligible dividends) shows the grossed-up amount (actual dividend × 1.38). Box 13 (non-eligible) shows actual × 1.15. You include the Box 11 or 13 amount in your income and then claim the dividend tax credit shown in Box 12 or 14.
Is it better to pay myself salary or dividends from my corporation? +
It depends on your province, your personal income, and your need for RRSP room (salary earns RRSP room; dividends do not). At low personal incomes, non-eligible dividends can be received nearly tax-free. A CPA can model the optimal mix for your situation.
What is the dividend tax credit? +
The dividend tax credit (s.121) reduces your tax to offset the corporate tax already paid on the income that generated the dividend. For eligible dividends, the federal credit is 15.02% of the grossed-up amount. Provinces add their own dividend tax credits on top.
Key terms
Related sections
Related calculators
Related guides
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 82. — 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.