Question

During 2018, Mr. Franz Schlitz receives $23,500 in eligible dividends from Canadian public corporations. Calculate how much Franz will include in his net income for tax purposes. Explain to him why this is not the $23,500 he received, and the purpose of the dividend tax credit. Please note a full calculation of the dividend tax credit, and after tax cash retention is not required.

Answer 1

Mr. Franz Schlitz has received an amount of $23500 in eligible dividends which is net of taxes (already paid by the corporation).

Hence, we will have to calculate the Gross income earned by Mr. Schlitz. The Gross up rate is 38% in 2018, i.e. his Gross income is $23500 + 38% of 23500 = $32,430.

In other words, 38% of 23500 i.e. $8930 is the tax already been paid on his behest by the corporation which is called "Dividend Tax credit".

Mr. Franz Schlitz, will report dividend income as $32430 (Gross up) in his tax return. However, he is also eligible to receive Dividend tax credit of $8930 (Which corporation has paid on your behest.)

The purpose of Dividend tax credit is to ensure that you are not being double taxed. To prove my point, i would say without the above mechanism corporation has already paid taxes of $8930 (on $32430) and Mr. Schlitz would have ended up paying more tax on $23500 (After tax income).

However due to concept of Dividend Tax credit, Mr. Schlitz will fairly report his Dividend Income as $32,430 and Tax credit of $8930 (which will be reduced from his overall tax liability upon filing tax return).