If you own an incorporated business in Canada, dividends can be a smart way to pay yourself—but understanding how they’re taxed is essential. This blog explains what you need to know about dividend income, how it shows up on your tax return, and the impact on your overall tax strategy.

What Are Dividends?

Dividends are payments from a corporation to its shareholders, typically made from after-tax profits. If you're a business owner paying yourself dividends, you’re receiving a share of your company’s earnings.

How Are Dividends Taxed?

Dividends are taxed differently from salary income. The Canadian tax system uses a concept called “integration,” where income is taxed once at the corporate level and again at the personal level—but with some tax relief through a dividend tax credit.

Here’s how it works:

Gross-Up

You must report more dividend income than you actually received. This is known as the gross-up and reflects the pre-tax amount the corporation earned before paying you.

Eligible Dividends: Grossed up by 38%
Ineligible (Non-Eligible) Dividends: Grossed up by 15%

Dividend Tax Credit

To offset the extra tax, you get a dividend tax credit, which reduces your personal tax liability.

Eligible Dividends: Federal DTC is 15.02%
Ineligible Dividends: Federal DTC is 9.03%

The actual tax you pay on dividends depends on your income level and your province, since each province has its own credit rates.

Dividends vs Salary: Which Is Better?

If you’re a small business owner or incorporated consultant, you’ve likely asked this question. There’s no one-size-fits-all answer—but here are some pros and cons to consider:

Pros of Dividends:

No payroll remittances (CPP, EI)
Simpler to administer
May result in lower overall tax in some cases

Cons:

No CPP contributions = lower retirement benefits
Dividends increase net income, which can affect:
- OAS clawbacks
- Child benefits (CCB)
- GST/HST credit eligibility
Can trigger Alternative Minimum Tax (AMT) if dividends are high

Reporting Dividends on Your Tax Return

Dividends must be reported on Line 12000 of your T1 personal tax return. You’ll also claim your dividend tax credit on page 7 of the return.

If you received dividends from a private corporation, you’ll likely receive a T5 slip. Make sure you:

Include all dividend income (cash and stock)
Report the grossed-up amount
Claim the DTC correctly

Family-Owned Corporations: Be Cautious

If you’re splitting income through dividends with a spouse or adult child, income attribution rules may apply. In most cases, the person who invested the capital must report the income.

Tip: If the lower-income spouse cannot fully use the DTC, it may make sense to have the higher-income spouse report the dividends—but only under specific conditions. Speak to your accountant before making this decision.

Strategic Tax Planning with Dividends

Understanding your marginal tax rate (MTR) is key. MTR tells you how much tax you’ll pay on the next dollar earned. Knowing your MTR helps determine:

Whether to pay more dividends
Whether to contribute to your RRSP to lower taxable income
The impact of clawbacks on benefits and credits

Example:

If you're in Ontario and your MTR is 44.97%, an RRSP contribution of $1,000 could:

Reduce your taxes by $449.70
Increase your CCB or other benefits
Lower your overall net income (and future dividend taxes)

Final Thoughts

Dividends are a valuable tool in your tax strategy—but they come with complexity. The key is to plan ahead, understand how they impact your total tax picture, and work with an advisor who understands the full scope of business owner taxation in Canada.

Need Help?

At FR Professional Accounting Services, we specialize in working with incorporated professionals, small business owners, and entrepreneurs. Whether you're navigating dividends, payroll, or HST filings—we’re here to make it easier and more tax-efficient.

Understanding Dividend Income for Canadian Business Owners