Taxation of Small Business Dividends in 2014

The 2013 Federal Budget announced that, beginning in 2014, the gross-up of small business dividends will be reduced from 25% to 18% and that the federal dividend tax credit will be adjusted as well. The net result is a slight increase in the taxation of other than eligible dividends at the federal level.

Since all provinces except Quebec use the same definition for Taxable Income as the federal government, this means that provincial taxes will also be affected by the change in gross-up. 

The way that the provincial or territorial dividend tax credit is defined varies by jurisdiction. The credit may be defined as a fraction of the actual dividend, the taxable dividend, the federal gross-up, or the federal credit. 

Jurisdictions who defined their credits based on the taxable dividend, federal gross-up or federal credit would have their credits changed as a result of the federal change so most provinces have made changes to their dividend tax credit rates.

Tune in next time for a province-by-province summary of marginal tax rates on small business dividends in 2013 and 2014 and an interpretation of the effects on planning. You will be interested to know that at a taxable income level of $80,000, the federal marginal tax rate on small business dividends increased from 10.83% to 12.96%.