Dividend Calculator

What Are Dividends?

Dividends are distributions of a company's earnings paid to shareholders. When you own shares of a dividend-paying company, you receive regular cash payments simply for holding the stock. In Canada, dividends from Canadian corporations receive preferential tax treatment through the dividend tax credit, making them one of the most tax-efficient forms of investment income.

Eligible vs Non-Eligible Dividends in Canada

Canadian dividends fall into two categories, each with different tax treatment:

• Eligible dividends are paid by public corporations and private companies that have paid the higher general corporate tax rate. They receive a larger gross-up (38%) and a more generous tax credit, resulting in lower personal tax.
• Non-eligible dividends are typically paid by Canadian-controlled private corporations (CCPCs) that pay the small business tax rate. They receive a smaller gross-up (15%) and a smaller tax credit.

The Dividend Gross-Up and Tax Credit Mechanism

Canada uses a gross-up and tax credit system to avoid double-taxation of corporate income. Here is how it works:

1. Gross-up: The actual dividend you receive is "grossed up" to approximate the corporation's pre-tax income. Eligible dividends are grossed up by 38%, and non-eligible by 15%.
2. Taxable amount: This grossed-up amount is added to your taxable income.
3. Federal tax credit: You receive a federal dividend tax credit of 15.0198% of the grossed-up amount for eligible dividends, or 9.0301% for non-eligible dividends.
4. Provincial tax credit: Each province provides an additional dividend tax credit that further reduces tax owing.

The net effect is that Canadian dividends are taxed at a significantly lower rate than interest income or employment income at the same level.

DRIP (Dividend Reinvestment Plans)

A Dividend Reinvestment Plan (DRIP) automatically uses your dividend payments to purchase additional shares of the same stock. The benefits include:

• Compound growth: Reinvested dividends buy more shares, which produce more dividends, creating a compounding effect
• Dollar-cost averaging: Regular reinvestment smooths out the purchase price over time
• No commission: Most DRIPs allow share purchases without trading fees
• Discipline: Automatic reinvestment removes the temptation to spend dividends

Yield on Cost Explained

Yield on cost (YOC) measures your current annual dividend income as a percentage of your original investment. If you invested $50,000 and now receive $5,000 per year in dividends, your yield on cost is 10%, even though the stock's current yield may be much lower. YOC is a powerful metric for long-term dividend investors because it demonstrates how dividend growth over time can dramatically increase the effective return on your original capital.

Canadian Dividend Aristocrats

The Canadian Dividend Aristocrats are companies listed on the TSX that have increased their dividends for at least five consecutive years. These companies tend to be large, stable businesses with strong cash flows, including major banks (Royal Bank, TD, BMO), utilities (Fortis, Emera), and telecoms (BCE, Telus). Investing in dividend aristocrats is a popular strategy for building reliable, growing income streams.

Tax Advantages: Dividends vs Interest Income

In Canada, $1,000 of eligible dividend income results in significantly less tax than $1,000 of interest income. For example, an Ontario resident earning $80,000 in employment income would pay roughly:

• Interest income: Taxed at your full marginal rate (approximately 29.65% combined)
• Eligible dividends: Effective rate of approximately 7-15% after the dividend tax credit
• Non-eligible dividends: Effective rate of approximately 15-22% after the dividend tax credit

This preferential treatment makes dividend-paying Canadian stocks particularly attractive for taxable investment accounts.