Tax strategies for dividend investors in Canada

One of the most underappreciated components in dividend investing is tax efficiency. That’s why Reader B talked about it at length about it in my Q & A with him. Therefore, understanding how dividend income is taxed in Canada and creating the best tax efficiency for your dividend income is very important.

Since this blog focuses on financial independence via dividend investing, I have written extensively about investing and the impact of taxes on dividend income. However, I don’t believe I have written a post summarizing tax strategies for dividend investors in Canada.

You can build a great dividend portfolio, but if you don’t strive for tax efficiency, your after-tax return (i.e. net return) may look very different. While it’s important to strive for tax efficiency, at the same time, it is important to keep an eye out for any upcoming or potential tax proposals and rule changes from the Canadian government and other foreign governments (like the US). Thus, while tax efficiency is exceedingly important, it should not be the number one driver of any portfolio strategy.

Let’s walk through how dividends are taxed, pitfalls one should avoid, and other strategies to help you keep more money in your pocket in the long run.

Note: I’m not a tax specialist. What I have shared in this post is purely based on my own knowledge. Always consult with a tax specialist. 

Why Tax Matters for Dividend Income 

Dividend paying stocks pay dividends regularly – monthly, quarterly, biannually, or annually. When you receive dividends inside your non-registered account, you need to pay tax. The amount of tax you pay will depend on several factors. 

Although high-yield dividend stocks may look good on paper, if you don’t pay attention to the type of dividends, taxes can erode the net yield. A 1-2% difference in effective tax rate can compound into large amounts over decades

That’s why you should always consider taxes and optimize your dividend income for after-tax return, not just gross yield.

How dividends are taxed in Canada

To understand how to optimize taxes on your dividend income in a non-registered account, we must first understand how the Canadian tax system treats dividends. 

Gross up & dividend tax credit 

For Canadian residents and citizens, dividends from Canadian corporations are subject to a “gross up + tax credit” mechanism. If corporations pay taxes on profits, then pass a portion of the profits onto shareholders in the form of dividends, the Canadian government wants to avoid so-called double taxation. Therefore, investors receive a credit (i.e. dividend tax credit) to make up for already paid corporate tax.

Eligible vs. non-eligible dividends 

The key difference between eligible and non-eligible dividends is whether the corporations have paid taxes on their profits first before distributing some of the profits to shareholders.

• Eligible dividends: dividends or distributions paid by corporations after the corporations have already paid taxes on their profits. Eligible dividends have a gross-up of 38%. In other words, dividends you received are grossed up by 38% when computing taxable income. You then receive a federal dividend tax credit of 15.02% of the grossed-up amount (plus a provincial part).
• Non-eligible dividends: some corporations do not pay taxes before distributing a portion of their profits to shareholders. REITs and income trusts would fall into this category. The grossed up rate for non-eligible dividends is 15% with a federal dividend tax credit of 9.03% of the grossed-up amount (plus a provincial amount). 

So, if you received $100 in dividends, you would get the following:

Eligible dividends: $138 for taxable income at your marginal tax rate. You then apply a federal tax credit of $20.72 that reduces your tax owing. In other words, the dividend tax credit as a percentage of the actual dividends is 20.73%. 

Non-eligible dividends: $115 for taxable income at your marginal tax rate. You’d get a federal tax credit of $10.38. In other words, the dividend tax credit as a percentage of the actual dividend is 10.38%.

Eligible dividends are taxed more favourably than non-eligible dividends. Hence, it makes sense to invest in stocks that pay eligible dividends in a non-registered account and avoid the non-eligible dividend complication by receiving them in tax-advantaged or tax-deferred accounts (i.e. TFSA, RRSP, and RRIF).

Note: each province and territory also has a different dividend tax credit rate, so your net benefit will depend on where you live. The key message here is that eligible dividends are always more tax-favourable than non-eligible dividends in non-registered accounts. 

In case you’re wondering, here are the combined federal and BC tax brackets and tax rates. 

Again, eligible dividends are very tax-favourable regardless which tax bracket you are in. Non-eligible dividends are more tax favourable than working income but not as tax efficient as capital gains. Because of the gross up and dividend tax credit, your effective marginal tax rate on dividends is lower than on working income and wages. In fact, the effective marginal tax rate on eligible dividends is negative if your taxable income is lower than $57,375 in 2025.

Once you get into the higher tax brackets, the benefits from the dividend tax credit shrink. For example, if you make more than $259,829, your eligible dividends would be taxed at 36.53% (note: not all of it, only for the amount over $259,829). 

Foreign dividends, Foreign Withholding Taxes & Tax Credits

If you receive dividends from the US or other non-Canadian companies, the dividends (or distributions) generally are not eligible for the Canadian dividend tax credit. Furthermore, foreign dividends are treated as ordinary income (i.e. working income) and taxed at your marginal tax rate. 

On top of that, you often have to pay foreign withholding taxes on foreign dividends. 

US dividends & withholding taxes

The default US withholding tax on dividends to non-US residents is 30%. Under the Canada-US tax treaty, most Canadian residents and citizens only pay 15% withholding tax on US dividends (note: there have been repeated proposals to raise the rates). The 15% withholding tax is exempt in RRSP and RRIF. To avoid the withholding tax for US brokerage accounts, you can file a W-8 BEN. 

The withheld amount that you paid can typically be claimed as foreign tax credits on your Canadian tax return. There’s a credit limit, though; the Income Tax Act limits the foreign tax credit to 15% of your foreign income. 

• Dividend tax drags – foreign withholding taxes for dividend stocks & equity ETFs

Other countries

Outside of the US, different countries have their own withholding rates. For example, some European countries withhold 15-30% on dividends. Depending on the tax treaty between Canada and these countries, you may be able to get foreign tax credits. 

Non-Residents 

If you are a non-resident of Canada but receive dividends from Canadian companies, you will get hit with a 25% withholding tax on the dividend payment. So if you are considering geo-arbitrage, you may end up paying a higher tax on dividends. 

Key tax strategies for Dividend Investors in Canada

Here are some useful strategies that dividend investors in Canada should consider to reduce their tax consequences and maximize their after-tax return.

Income splitting (within family)

If one spouse or family member is in a lower tax bracket, you can consider shifting income to reduce your family’s total tax bill. Please note that Canada has an attribution rule, so you can’t just gift dividend stocks freely.

A few ways to split income effectively with a spouse or common-law partner would be:

• Spousal RRSP contributions: the higher income spouse can set up a spousal RRSP and contribute money to a lower-income spouse’s RRSP. The tax deduction would go to the higher-income spouse, potentially bringing down the higher-income spouse to a lower tax bracket when filing taxes. By having both an RRSP and a spousal RRSP, the couple may be able to balance income in retirement and ensure both are in the lowest tax bracket possible.
• TFSA contributions: you can contribute money toward your spouse’s TFSA. This is an effective way for the higher-income spouse to “invest” for the lower-income spouse. 
• Loan to spouse: the higher-income spouse can lend money to the lower-income spouse at the prescribed CRA rate and let them invest. This would then allow you to avoid attribution rules. Note: You must follow the specific rules.

Pension income credit/splitting

There are a few ways to reduce taxes by utilizing pension income splitting and pension income credit.

• Pension income splitting: couples may split up to 50% of what’s considered eligible pension income (i.e. RRIF income) to the spouse in a lower tax bracket. As a result, this can reduce their combined tax.
• Pension tax credit: There’s a federal income tax credit up to $2,000 (per person). This credit translates to a maximum federal annual tax savings of $300. 
• CPP/QPP sharing: Canada Pension Plan and Quebec Pension Plan may be shared between spouses to reduce net income. Essentially, by sharing CPP, you and your spouse may have roughly the same income, so both of you are in the same tax bracket.

Taking advantage of attribution & loan rules 

The attribution rules are implemented to prevent the higher-income spouse from gifting money to the lower-income spouse and using the money to produce dividends. But there are exceptions and maneuvers:

• Use prescribed rate loans: by lending money at the prescribed interest rate and having the recipient pay the interest, the investment return may remain taxed in the recipient’s hands and not the lender’s. You must ensure interests are paid each year and have all the correct documentation. 
• Structuring with trusts/holding companies: one can potentially use corporations, holding companies, or family trusts to manage dividends, reinvest, and control distribution timing. But this is extremely complex to set up and maintain (also costly). The Canadian government has been looking at closing this loophole for many years and you’re more prone to CRA audits if you go with this method. This is a more advanced setup, so definitely check with a tax specialist. O

Note: if you are considering loaning money to your spouse for investing purposes, I’d recommend consulting with a professional to make sure everything is set up correctly. 

Declaring dividends in favourable years 

Since dividends are included in taxable income via gross up, it matters a lot which tax bracket you are in.

A strategy to lower taxes would be to front load dividends when you expect a lower income year. When you have a large income year, you want to avoid large dividend income. 

But if you’re staying fully invested like us, can you really font load or shift your dividends?

Yup, however, that’s not exactly easy to do. Therefore, the easiest way would be using capital losses, tax credits, and tax deductions to reduce your taxable income. 

Use tax-efficient accounts

To be as tax-efficient as possible, the easiest approach is to utilize the different tax-efficient accounts.

• TFSA: Dividends and capital gains earned inside a TFSA are completely tax-free. Withdrawals are also tax-free. Therefore, holding high yield or high growth stocks inside a TFSA can be quite attractive. For some, if may make sense to invest in US dividend stocks in TFSA. As mentioned, the higher-income spouse can contribute money to the lower-income spouse’s TFSA without worrying about the attribution rules.
• RRSP/RRIF: contributions to RRSP reduce taxable income at your marginal tax rate. Money inside an RRSP/RRIF can grow tax-deferred. When you withdraw from a RRSP or RRIF, the amount is taxed as working income at your marginal tax rate. The idea with the RRSP is to contribute when you are at a higher marginal tax rate and withdraw money from the RRSP/RRIF when you are at a lower marginal tax rate. As mentioned, the higher-income spouse can open a spousal RRSP to lower their tax consequences.
• Registered accounts vs. non-registered: if you invest dividend stocks inside a non-registered account, the typical recommendation is to invest in stocks that pay eligible dividends. Capital gains are also taxed favourably in non-registered accounts. Depending on the registered accounts, they are either tax-deferred or tax-free.

You need to be careful when you move stocks between registered and non-registered accounts. If you move a stock in-kind from a non-registered account to a registered account, you are deemed by the CRA to have “sold” the stock at the market price. Therefore, this will trigger capital gain or loss and you must report it when you file your taxes.

• The Millennials’ Ultimate TFSA Guide
• The Millennials’ Ultimate RRSP Guide

Structuring withdrawals to minimize tax spikes 

To be as tax efficient as possible in retirement, you want to structure your withdrawals so you are in the lowest tax bracket possible. It is always advised to avoid income “bumps” that push you into a higher bracket. 

How to structure withdrawals to minimize tax spikes is something I have spent a lot of time thinking about and modelling. This is also why Mark and Joe at Cashflows and Portfolios offer the Do-for-You Retirement Projection services. 

Generally speaking, you want to withdraw from the different accounts and try to smooth out your taxable income. The withdrawal order matters, and when you are eligible for Old Age Security (OAS), you want to watch out for your taxable income to avoid OAS clawbacks. (This is especially important with regard to the ‘grossing up” – eg. $10K worth of dividends really becomes $13,800 that you have to claim on your tax return).

Having said that, if you are facing potential OAS clawbacks, that means you’re doing quite well in your retirement. Facing potential OAS clawbacks is a good problem to have, it’s way better than not having enough money in retirement and need to be 100% dependent on OAS to supplement your retirement income. That’s why in our retirement calculations and projections, we haven’t really considered OAS and CPP. We treat them as extra gravy. 

An effective way to reduce overall income is to delay large capital gains to years when you have a lower income. You also want to avoid large RRSP/RRIF withdrawals to avoid sudden jumps in taxable income. 

Changes and proposed updates to watch out for 

Tax rules are always changing, so we must keep an eye on any tax changes and proposed updates. Here are some key things that may affect dividend investors in Canada:

• The lowest federal personal tax rate is expected to go from 15% to 14% in 2026. The basic personal amount and brackets are also indexed.
• Capital gains above $250k have been moved from 50% to 66.77% here in Canada. Will there a further change to numbers is something one should keep an eye on. 
• The US has been proposing raising the withholding tax or changing the definition that affects Canadian investors holding US equities. This can create a drastic effect for Canadians.
• RRIF’s minimal withdrawal rate may be reduced by 25%

Summary: Tax strategies for dividend investors in Canada 

In summary, here are the key tax strategies to keep in mind when you are a dividend investor in Canada: 

1. Eligible vs non-eligible vs foreign dividends – they are taxed differently. Eligible dividends are taxed more favourably in non-registered accounts.
2. Utilize TFSA – dividend income, capital gains, and withdrawals are tax-free
3. Utilize RRSP/RRIF – dividend income, capital gains are tax-deferred upon withdrawals. Avoid lumpy RRSP/RRIF withdrawals
4. US and international holdings: use them strategically and be mindful of which account you hold these foreign holdings in due to withholding taxes and foreign tax credit limitations
5. Utilize income splitting techniques: there are many ways to split income if you have a spouse or common-law partner. Always watch for attribution rules
6. Optimize withdrawals in retirement: this is one of the most important things to consider in retirement. You want to avoid lumpy withdrawals or have fluctuating income. What you want is to smooth out your income to avoid bracket jumps and OAS clawbacks.
7. Tax law changes: understand and watch out for tax changes
8. Use a professional: taxes can be complex so it is worthwhile to consult and use a professional to figure out how to minimize your tax consequences.