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The dividend tax credit in Canada, explained

Canadian dividends are taxed in three steps. You gross the dividend up, figure the tax on that bigger number, then subtract a federal and a provincial credit. The result is usually less tax than on the same amount of interest.

Beginner guide · 8-minute read · Updated 2026-11-01

The short answer

The dividend tax credit lowers the tax on dividends from Canadian companies. It exists because the company already paid corporate tax on that money. The credit gives part of that back to you, so the same dollar isn't fully taxed twice.

It only works in a regular (non-registered) account. In a TFSA there's no tax to reduce. In an RRSP, withdrawals are taxed as plain income and the credit is gone. My guide to where to hold dividend stocks covers that choice.

US and other foreign dividends get no dividend tax credit at all (canada.ca). They're taxed like interest. For those, see US dividends and the foreign tax credit.

Eligible vs non-eligible dividends

There are two kinds of Canadian Dividend, and your T5 slip says which one you got.

• Eligible dividends mostly come from big public companies that pay the full corporate tax rate. Most dividends from TSX-listed stocks are eligible.
• Non-eligible dividends (the CRA calls them "other than eligible") mostly come from small private companies that paid a lower corporate rate.

Eligible dividends get the bigger gross-up and the bigger credit. The table below has the federal numbers from the CRA.

Sources: gross-up at canada.ca (lines 12000 and 12010), federal credit at canada.ca (line 40425).

Step 1: the gross-up

First you make the dividend look bigger. For an eligible dividend you report 138% of what you received. That bigger number is the taxable amount.

Why make it bigger? The gross-up is a rough stand-in for the profit the company earned before it paid its own tax. You're taxed as if you'd earned that, and then the credit takes the company's tax back off.

The gross-up matters even if the credit cancels most of the tax. It raises your net income, and some benefits are based on net income.

Step 2: the tax, then the credits

Next you work out tax on the grossed-up amount at your normal rate. Then you subtract:

1. The federal dividend tax credit, a set percent of the grossed-up amount.
2. Your province's dividend tax credit, claimed on line 61520 of your provincial Form 428 (in Quebec, line 415 of the TP-1).

A worked example (hypothetical, federal only)

You get a $1,000 eligible dividend from a Canadian company in a regular account. To keep the math clear, we'll use a round, made-up federal rate of 20% on your next dollar of income. That is not a real federal bracket. Look up yours on canada.ca.

How the numbers work:

• Gross-up: $1,000 × 1.38 = $1,380.
• Tax: $1,380 × 20% = $276.00.
• Credit: $1,380 × 15.0198% = $207.27.
• Owed: $276.00 − $207.27 = $68.73.

Check it a second way. The federal credit is set at 6/11 of the gross-up. The gross-up was $380. And $380 × 6 ÷ 11 = $207.27. Same credit.

So at this made-up rate, the dividend costs about $131 less in federal tax than the same $1,000 of interest ($200.00 − $68.73 = $131.27).

A non-eligible $1,000 dividend works the same way with smaller numbers. Taxable amount $1,150. Tax at 20% is $230.00. Credit is $1,150 × 9.0301% = $103.85. Federal tax owed: $126.15.

Your province adds its own credit

Every province and territory has its own dividend tax credit. The rates differ and some change every year. Here are the ones we could confirm on an official page:

These are percents of the grossed-up amount. In the example above, an Ontario resident would add a provincial credit of $1,380 × 10% = $138.00, against Ontario tax on the same $1,380.

Quebec works on its own return. Revenu Québec's line 415 gives the credit as a percent of the actual dividend: 16.1460%, 3.9330% for eligible and ordinary dividends (revenuquebec.ca). That page isn't labelled with a year, so check it when you file.

Every other province has a credit too. I list only the rates we could verify. Your provincial Form 428 shows yours. Sources: Ontario at ontario.ca, Newfoundland and Labrador at gov.nl.ca, BC at www2.gov.bc.ca, Yukon at yukon.ca.

Our Canadian dividend tax calculator runs these steps on your own numbers, line by line.

What to do with this

• Hold Canadian dividend payers in a regular account if your TFSA is full. That's where the credit actually does its job.
• Watch the gross-up if you get income-tested benefits. Your net income goes up by more than the cash you got.
• Read your T5 slip. It already shows the taxable amount and the federal credit. You don't redo the math by hand.

As of October 2026, the CRA explains the federal credit on its line 40425 page, linked above. For how dividends fit into a whole plan, read dividend investing explained. If you also sell covered calls on your shares, the wheel strategy and taxes on selling options in Canada cover the option side.

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