Dividends Need Focus in Year End Planning

Over the past several years, corporate income tax rates have decreased which has affected reporting by individual investors on their personal returns for dividend income. 

The current gross-up for “eligible dividends” is 38%, meaning you’ll have to report $138 for each $100 dividend income you receive. You’ll get a federal dividend tax credit for $20.73 for each $100 dividend income you receive, as well as a provincial credit.

But for "other than eligible dividends"—those received from Canadian Controlled Private corporations—taxes will go up in 2014. The amount of the “gross-up” of these dividends will be reduced from 25% to 18% and the federal Dividend Tax Credit will be reduced from 16.67% of the actual dividends to 13% of the actual dividends. As many provinces base their provincial Dividend Tax Credit rate on the federal rate, those provincial tax credits will be reduced as well.

The result is a tax increase that should be addressed in year-end tax planning. Should more income be received from salary in 2014? Should the income increase be offset by RRSP contributions? Astute tax and financial advisors will do the math before year-end.