When it comes to investing in stocks, dividends are a popular way for companies to share their profits with their shareholders. However, not all dividends are created equal. There are two types of dividends that investors in Canada should be aware of: actual dividends and taxable dividends. In this article, we will discuss the differences between the two and everything else you need to know.

Actual Dividends

Actual dividends are the total amount of money a shareholder receives from a company’s profits. This includes any special dividends, capital dividends, and other payments made to shareholders. Actual dividends are the amount of money that is actually paid out to shareholders in cash or other assets. It’s important to note that actual dividends are not always taxable.

Taxable Dividends

Taxable dividends are the portion of actual dividends that are subject to tax. In Canada, taxable dividends are eligible for a dividend tax credit, which reduces the amount of tax paid on the dividend income. The dividend tax credit is a non-refundable tax credit, which means it can only be used to reduce the amount of tax owed. Taxable dividends are calculated as the grossed-up amount of actual dividends multiplied by the dividend tax credit.

The gross-up amount is calculated by adding a percentage of the actual dividend to the taxable income of the shareholder. The percentage depends on the type of dividend received, as well as the tax bracket of the shareholder. The gross-up amount is then subject to tax at the shareholder’s marginal tax rate. The dividend tax credit is calculated as a percentage of the gross-up amount, which varies depending on the type of dividend and the shareholder’s tax bracket.

Which Dividend Type Is Better?

Whether actual or taxable dividends are better depends on your personal tax situation. Generally speaking, taxable dividends are more advantageous for most taxpayers because of the dividend tax credit. The dividend tax credit can reduce the amount of tax paid on the dividend income, which can be significant for high-income earners.

However, there are some situations where actual dividends may be preferable. For example, if you have little to no taxable income, actual dividends may be tax-free, while taxable dividends may still be subject to tax. In addition, if you have capital losses to carry forward, you may be able to offset them with actual dividends.

Conclusion

In conclusion, it’s important to understand the differences between actual dividends and taxable dividends in Canada. Actual dividends are the total amount of money a shareholder receives from a company’s profits, while taxable dividends are the portion of actual dividends that are subject to tax. Whether actual or taxable dividends are better depends on your personal tax situation, so it’s important to consult with a tax professional to determine which option is best for you.