How taxes on dividends differ

The advantage goes to shareholders of Canadian public companies, thanks to federal and provincial credits.

Matthew Elder 17 May, 2016 | 5:00PM

Note: This article is part of Morningstar's May 2016 Income Investing Week special report.

Dividends have long been popular as a tax-friendly source of income. Once upon a time, if you wanted dividends you purchased preferred shares of large corporations. But increasingly, common shares have emerged as the biggest source of dividend income, which of course comes with the added benefit of potential capital appreciation of the underlying stock. (Preferreds typically have little potential for capital growth.)

However, not all dividends are treated equally. The tax advantage of Canadian dividends comes from federal and provincial dividend tax credits. To claim the federal dividend tax credit, you must first "gross up" the amount of dividends received. You then compute a dividend tax credit based on this inflated amount. (These amounts are calculated for you on T3 and T5 tax slips.)

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Matthew Elder

Matthew Elder