Dividends are paid out of a corporation’s retained earnings, which is technically the net income after taxes each year. Only shareholders are entitled to receive dividends, not employees. Since the corporation has already paid tax on its profits at a rate of 15.5%, a dividend tax credit is provided so taxpayers are not double taxed on the dividend income.
On the personal tax return the dividend is grossed up by 25% for non-eligible dividends. To maintain an integrated tax system the dividend is reported at its pre-tax amount. The dividend tax credit then kicks in to eliminate most of the tax that the corporation already paid on the pre-tax amount.
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