The dividend tax credit is how Canada avoids taxing the same profit twice: once in the company and again in your hands. For an eligible dividend, you report 138% of what you received, then claim a federal credit of 15.0198% of that grossed-up amount, plus a provincial credit. For a non-eligible dividend it’s 115% and 9.0301%. Dividends from US and other foreign companies get no credit at all. That makes Canadian dividends one of the lowest-taxed kinds of investment income in a regular account, with two catches people often miss.
How the gross-up and credit work
Take C$10,000 of dividends received in a non-registered account:
| Kind of dividend | Added to your income | Federal dividend tax credit |
|---|---|---|
| Eligible (most large Canadian public companies) | C$13,800 | about C$2,073 |
| Other than eligible (most small private corporations) | C$11,500 | about C$1,038 |
| US or other foreign | C$10,000 | none; a foreign tax credit for US tax withheld instead |
Federal rates from the CRA’s 2025 Federal Worksheet. Your province adds its own dividend credit at its own rate.
The credit is non-refundable: it reduces tax you owe, including tax on other income, but doesn’t pay you back if it’s more than your tax. You rarely need to work any of this out. Your T5 or T3 slip shows the taxable amount and the credit, and tax software fills it in.
The first catch: the gross-up raises your income
The gross-up isn’t money you received, but it counts as income. For most people that doesn’t matter. For retirees it can, because several income-tested benefits look at net income after the gross-up.
- The OAS clawback. Old Age Security is reduced by 15% of net income above a yearly threshold, C$93,454 on 2025 income. C$10,000 of eligible dividends counts as C$13,800 toward it.
- The age amount. The federal credit for people 65 and over shrinks by 15% of net income above C$45,522 (2025 figures). The gross-up eats into it too.
A retiree with a large non-registered portfolio of Canadian dividend stocks can be pushed over these thresholds by income they never actually received. A planner will look at whether some of that money belongs in a TFSA, whose income doesn’t count toward OAS, or whether capital gains or RRIF timing would be cheaper.
The second catch: registered accounts don’t get it
The credit only applies to dividends you report on your return, so dividends earned inside an RRSP, RRIF or TFSA get no credit. In a TFSA that doesn’t matter, because nothing is taxed. In an RRSP it does: every dollar you take out later is taxed as ordinary income, so Canadian dividends there lose their tax advantage.
That’s why the usual starting point for where to hold what is:
- Canadian dividend stocks in a non-registered account, where the credit works.
- US dividend stocks in an RRSP or RRIF. The US normally withholds 15% on dividends paid to Canadians under Article X of the tax treaty, but Article XXI exempts dividends paid to plans run exclusively to provide retirement benefits, which is how RRSPs and RRIFs avoid it.
- Not in a TFSA, for US dividends. A TFSA isn’t covered by that exemption, so the 15% is withheld, and because TFSA income isn’t on your return there’s no Canadian tax for a foreign tax credit to offset. The withholding is simply lost.
These are starting points, not rules. Your tax bracket, how much room you have in each account and when you’ll need the money all change the answer.
US and foreign dividends in a regular account
Foreign dividends are reported in Canadian dollars with your other investment income on line 12100, with no gross-up and no credit. If the US withheld tax, you can usually claim it back as a foreign tax credit on line 40500, up to the Canadian tax on that income. If the cost of your foreign investments, including US shares held at a Canadian broker, tops C$100,000 at any time in the year, you also file Form T1135 with the CRA.
If you own a corporation
Owners of small Canadian corporations usually pay themselves in some mix of salary and non-eligible dividends. The dividend tax credit is designed so the total tax is roughly similar either way, but the choice has side effects: dividends aren’t on the CRA’s list of earned income that creates RRSP room, so an owner paid only in dividends builds none. This is one of the most common questions an accountant and a planner work through together, and the right mix changes as you approach retirement.
Common mistakes
- Chasing Canadian dividends for the credit alone. A low tax rate on a narrow portfolio of banks and utilities isn’t worth a lack of diversification.
- Holding Canadian dividend stocks in an RRSP while a non-registered account holds bonds whose interest is fully taxed.
- Holding US dividend stocks in a TFSA and losing 15% a year to withholding.
- Ignoring the gross-up near OAS age. It counts toward the clawback even though you never received it.
- Forgetting the T1135 once US shares in a non-registered account pass C$100,000 in cost.
Questions to ask a planner
- Which of my holdings belong in which account, and how much tax would moving them save each year?
- How close am I to the OAS clawback, counting the gross-up?
- For my corporation, what mix of salary and dividends do you suggest, and why?
- Do you work with my accountant, or do you prepare the tax projections yourself?
- Do you or your firm earn anything from the funds or products you recommend?
When a fee-only planner is worth it, and what it costs
Account placement and dividend income are a one-time setup with occasional tune-ups, which suits an advice-only planner charging a flat fee or by the hour. Canadian fee-only planners who publish prices charge a median C$1,900 for a one-time plan (middle half C$950 to C$3,000, 46 firms) or C$250 an hour (15 firms). Ongoing planning runs a median C$2,300 a year (21 firms). If you have a corporation or are within a few years of OAS, a yearly review usually pays for itself. If you’re decades away and mostly in an RRSP and TFSA, one plan is often enough.
Our guide to what fee-only advisors charge in Canada explains these figures, and what 1% costs on C$1 million compares them with a percentage fee.
Where to go next
If you’re a US citizen in Canada, or hold Canadian funds as a US person, the rules are different again: read cross-border financial advisors and see the cross-border specialty. If you winter in the US, see financial planning for Canadian snowbirds. New to Canada? Start with financial planning for newcomers.