Question

Bogdan received the following dividends in 2018: • an eligible dividend of $4,000 • a non-eligible dividend of $1,500 • a dividend of $850 from a foreign corporation, net of $150 of foreign tax withheld • a stock dividend of 100 shares; the paid-up capital of the corporation was increased by $10 for each share issued, and the issuing company is a public company • a capital dividend of $2,000 Required: Indicate the amount to be included in net income for tax purposes in respect of each of the dividends received by Bogdan in 2018.

Answer 1

The taxability of dividend depends on the type of dividend.

1) Eligible dividend : Eligible dividend are divideds issued by the Corporation of that country to its residents. It is included in the taxable return for tax purpose. Hence, the amount of $4000 is to be included in the taxable income

2) Non-eligible dividend : Non-eligible dividends are dividends which are not eligible dividends. The difference between the two is the gross up rate only. These dividends are to be included in the taxable income. Hence, $1500 is to be included in the taxable income.

3) Foreign dividends : These are the dividends paid by the companies located in the countries in which the government has entered into a tax treaty with the government of that country. The dividends are included in the taxable income. Hence $1000 ($850 + $150) is to be included in the taxable income.

4) Stock divdends are dividends paid in the form of stock instead of cash. These dividends are taxable only when the stock is sold by the stockholders and not taxable in the year of receipt. Therefore, the stock-dividend received is not included in the taxable income.

5) Capital dividend is the dividend distributed out of the capital and not the earnings of the company. Hence, the dividends are not taxable. Therefore the capital dividend of $2000 is not included in the taxable income.