How dividends are taxed in Ontario: gross-up and credits

Why dividends are taxed differently

A corporation pays tax on its profit before it can pay a dividend, because a dividend is not deductible to the corporation. Taxing the full dividend again at your personal rates would tax the same profit twice. The personal system responds by adding a gross-up to your income and then giving you a dividend tax credit to offset the corporate tax that is assumed to have been paid.

This applies to dividends from taxable Canadian corporations. The CRA says foreign dividends do not qualify for the credit, so a dividend from a foreign company is taxed in another way, and a foreign tax credit may be relevant.

Eligible and other than eligible dividends

The CRA splits taxable dividends into two kinds. Eligible dividends carry a larger gross-up and a larger credit. Other than eligible dividends, often called non-eligible, carry a smaller gross-up and a smaller credit. The label does not change the cash you receive, only how the dividend is reported and credited. Our eligible dividend entry gives the short definition.

The paying corporation decides how much of a dividend to designate as eligible, and its own tax position limits that amount. It must designate an eligible dividend before or when it pays it and notify shareholders in writing. A letter, a note on the cheque stub or, where every shareholder is also a director, a note in the minutes are examples the CRA gives. If you own the corporation, ask your accountant to document the designation each time a dividend is paid.

The gross-up and federal credit

When you have no slip, the CRA’s guidance says to multiply the actual eligible dividends you received by 138% and the other than eligible dividends by 115%, and report the results on lines 12000 and 12010. With a T5 slip, the slip shows the actual amount, the taxable amount and the credit in separate boxes: boxes 24, 25 and 26 for eligible dividends and boxes 10, 11 and 12 for other dividends.

The federal credit is calculated on the taxable amount. On the CRA’s 2025 federal worksheet it is 15.0198% of the grossed-up eligible amount and 9.0301% of the grossed-up other than eligible amount. You claim it on line 40425. The CRA’s guidance for the 2026 return will be on its pages when that year’s forms are released.

Ontario’s dividend tax credit

Ontario has its own credit, claimed on line 61520 of Form ON428 using the Ontario worksheet. On the 2025 worksheet the Ontario credit is 10% of the grossed-up eligible amount and 2.9863% of the grossed-up other than eligible amount. Those are credits against Ontario tax, so they work alongside the federal credit.

Your actual tax then depends on your other income, because the grossed-up dividend is added to it and taxed at the marginal rates for each bracket. The 2026 federal and Ontario brackets are in our 2026 tax guide, and the Ontario income tax calculator can model your own figures. We do not state a single combined rate here, because it changes with income.

A worked example

These round figures are illustrative only and ignore your other income. Suppose you receive an eligible dividend of $10,000. The taxable amount is $13,800. The federal credit is 15.0198% of $13,800, about $2,073, and the Ontario credit is 10% of $13,800, which is $1,380. Both credits reduce tax calculated on the $13,800.

Now suppose the $10,000 were an other than eligible dividend. The taxable amount is $11,500. The federal credit is 9.0301% of $11,500, about $1,038, and the Ontario credit is 2.9863% of $11,500, about $343. The grossed-up amount is lower, and so are the credits.

The example shows the mechanics, not your result. The tax that remains after credits depends on the rest of your return, and a low-income year can produce a different picture from a high-income year.

What the corporation must do

A corporation that pays dividends reports them on T5 slips, which show the actual and taxable amounts and the credit. The slip you receive is the number to use on your return. Keep the directors’ resolution declaring each dividend, the designation notice and the payment record, so that the dividend can be tied to a specific date and amount.

A mismatch between what you reported and what the corporation filed can lead to a CRA letter. If an owner takes money out without declaring a dividend, the payment may be recorded as a shareholder loan instead, so see our article on avoiding shareholder loan income inclusion.

What dividends do not provide

Dividends are not pay for an employee. The CRA describes CPP pensionable earnings as an employee’s remuneration from pensionable employment, so dividends are generally not a basis for CPP contributions or the retirement benefit they build. RRSP room is based on 18% of the previous year’s earned income, up to an annual limit, so ask your accountant how a dividend-only pay mix affects your retirement savings.

The grossed-up amount also raises your net income. That figure is used in tests such as the CRA’s old age security repayment threshold, so a large dividend can affect more than your tax bill. For the full comparison with salary, read our salary versus dividends guide.

What to discuss with your accountant

If you own a corporation, ask how much of a planned dividend can be eligible and how it will be documented. Ask how the dividend interacts with your other income, with tax on split income if family members hold shares, and with the timing of the corporation’s year-end.

Bring your last notice of assessment, the corporation’s financial statements, the share structure and any T5 slips. The tax advisory service page explains how Sora can help you decide, and the corporate tax page covers the company side of the same question.