How Much in Dividends Can You Take Tax-Free?

How much can I pay myself in dividends before I owe tax?

No. The first slice of dividends from your corporation is not automatically tax-free. With no other income, the amount that produces zero personal income tax depends on dividend type and your province or territory at year-end (CRA: tax rates by province). The corporation's tax treatment is separate from your personal tax on the dividend.

If a corporation owes tax when it pays a dividend to its controlling owner, that owner may also owe the corporation's tax, up to the dividend's value. The CRA can assess this liability at any time (Income Tax Act, section 160).

The CRA's T5 instructions set out these figures. The maximum federal basic personal amount is $16,452, but it is a non-refundable credit, not a dividend exemption (Department of Finance). Provinces and territories have their own basic amounts and dividend credits. Zero federal tax therefore does not prove zero total tax.

Why is the tax-free amount larger for eligible dividends?

Eligible dividends receive a larger credit because they generally come from corporate income taxed at the general corporate rate. Non-eligible dividends generally come from income taxed at a preferential corporate rate, including small-business income (CRA folio, paragraphs 2.48–2.50). The larger eligible-dividend credit can offset personal tax well beyond the basic personal amount. It does not erase the corporation's earlier tax.

The word eligible describes the dividend's tax category, not your eligibility to receive it. A larger eligible dividend also creates a larger grossed-up amount on your return. That can matter for benefits even when the dividend produces no personal tax.

Are dividends from my own corporation eligible or non-eligible?

Dividends from a Canadian-controlled private corporation are generally non-eligible when paid from profits taxed at the small-business rate. A dividend is non-eligible unless the corporation properly designates it eligible. An excessive eligible designation can trigger corporate tax. If the designation exceeds its eligible-dividend capacity, the corporation can elect to reclassify the excess as non-eligible, with concurrence from all known shareholders who received or were entitled to it, within 90 days after the assessment notice (Income Tax Act, section 185.1). Check the designation before using an eligible-dividend zero-tax example.

Your T5 shows whether the dividend is eligible or non-eligible (CRA: T5 slip). For the corporation's designation and tax accounts, see How corporations are taxed.

Can federal tax be zero while my province still taxes the dividend?

Yes. The federal and provincial calculations use different tax rates, basic personal amounts and dividend credits. Your province or territory of residence at year-end determines the applicable provincial or territorial rates (CRA: current-year rates). Quebec residents must also report the dividend and claim its provincial credit on the separate TP-1 return, using an RL-3 or T5 where applicable (Revenu Québec).

For a B.C. resident, the province publishes its own basic amount, tax reduction and dividend credit rates. A dividend can exhaust those credits while the federal credit still covers federal tax. The first example shows the effect. To estimate tax on a larger dividend in your province, use Tax on dividends from your corporation.

What if I also took a salary this year?

Salary uses part or all of your basic personal amount before a dividend is added. The dividend is then taxed on top of your other income, after its gross-up and dividend credit. You cannot claim a fresh basic personal amount for each kind of income (CRA: basic personal amount).

Add your salary, both kinds of taxable dividends and other income before estimating your marginal tax. Keep your T4 and T5 slips and note your province of residence. If you are deciding whether some salary is useful for RRSP room or CPP, see Salary for RRSP room and CPP.

Can a large tax-free dividend trigger minimum tax?

A dividend tax credit can matter in a minimum-tax calculation, but whether minimum tax applies depends on the full return. The federal exemption is $181,440 of adjusted taxable income; this calculation removes the dividend gross-up (Income Tax Act, sections 127.51–127.52). The no-other-income examples below fall below that exemption.

Do not extrapolate a small-dividend zero-tax result to a very large eligible dividend. Use Form T691 for the year of the dividend when a minimum-tax check is needed; provincial minimum tax can also apply (CRA: minimum tax).

Can my spouse or adult child take tax-free dividends too?

Possibly, but having no other income is not enough. The tax on split income can apply to dividends from a related business, including dividends paid to an adult family shareholder, unless an exclusion applies (CRA: tax on split income). A family member cannot simply borrow the owner-only example's result.

A family shareholder's result depends on TOSI and, sometimes, attribution (CRA: loans and transfers of property). See Paying family members before using the owner-only example.

If TOSI applies to a child who was under 24 at the start of the year, a parent or owner linked to that related business may be jointly liable for the tax; the CRA can assess at any time (Income Tax Act, section 160). If TOSI and attribution do not apply, an owner who qualifies for the spouse amount can instead elect on their return to report all their spouse's taxable Canadian dividends when doing so increases that credit (Income Tax Act, section 82(3)).

Does a tax-free dividend still raise my income for benefits?

Yes. The grossed-up taxable amount, not just the cash dividend, enters line 12000. Outside TOSI, it generally raises net income used for future Canada child benefit payments, even when the dividend produces no tax. If TOSI applies, the benefit uses a special adjusted family net income calculation (CRA: dividend reporting; CRA: Canada Child Benefit guide).

Check income-tested credits and benefits using the tax return's net income, not the cheque amount. A zero income-tax calculation is only one part of the cash-flow result.

Example

All figures below are illustrative Canadian dollars. These examples assume a full-year Canadian resident, taxable dividends from a Canadian corporation, no other income or credits unless stated, and no tax on split income, attribution or minimum tax. Round figures are planning illustrations, not filing thresholds.

Owner with no other income

In B.C., about C$28,000 of non-eligible dividends can produce zero federal and provincial personal income tax under the published rates, basic amounts, tax reduction and dividend credits. An eligible dividend can reach about C$80,000 before federal tax begins in the same simplified case. The corporation must actually be able to designate the second dividend as eligible. The CRA's federal brackets and B.C. credits produce these rounded illustrations.

These are B.C. illustrations only. Each other province needs its own calculation; the CRA's current provincial dividend-credit page still points to the prior-year return worksheets.

Owner who already took a salary

An owner in B.C. takes C$40,000 of salary, then C$10,000 of non-eligible dividends. The salary has already used the basic personal amount. The dividend adds C$11,500 of taxable income; its credits do not offset all the extra federal and B.C. tax. This owner has no zero-tax room for that dividend. Calculate the final amount using the whole return, including salary-related credits.

Spouse shareholder with no income

A spouse with no other income receives a C$20,000 non-eligible dividend. A zero-tax calculation is useful only if the tax on split income rules do not apply. The spouse reports C$23,000 of taxable dividend income; that amount can raise the couple's adjusted family net income for the Canada child benefit.

Different for you?

• Your dividend is larger or you live outside B.C.: calculate the provincial tax in Tax on dividends from your corporation.
• Your corporation may pay an eligible dividend: check the corporate designation in How corporations are taxed.
• Your corporation has a capital dividend account: a capital dividend follows separate rules; see How corporations are taxed.
• A family member owns shares: test the dividend under Paying family members.
• You are choosing between salary and dividends: compare the whole-year result in Salary or dividends.
• You also file a U.S. return: zero Canadian personal tax does not settle U.S. tax on the dividend. See American owners of Canadian corporations (IRS: worldwide income).
• You have a large dividend, other income, or income-tested benefits: bring your T4, T5, corporate dividend designation and prior-year return to an individual tax review.