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Personal Tax -> Dividend tax credits -> Negative marginal tax rate

Negative Marginal Tax Rate for Eligible Dividends

The negative marginal tax rate occurs when the enhanced dividend tax credit rate is higher than the lowest income tax rate.  This means someone in the lowest tax bracket (after combining Federal + provincial tax brackets and rates) can reduce their other taxes payable by receiving dividends eligible for the enhanced dividend tax credit.

Enhanced dividend tax credit using combined
Federal/Ontario tax rates for 2016

Tax Bracket 1
up to $42,201

Combined federal + Ontario tax rate

20.05%

 
Dividends eligible for enhanced dividend tax credit

$100.00

Gross-up 38.00
Taxable dividend $138.00
 
Federal + Ontario tax at 20.05%

$27.67

Less dividend tax credits:
Federal 15.02% x $138 $20.73  
Ontario 10% x $138 13.80  
Total dividend tax credits   $34.53
Tax payable on dividends -$6.86
 
Marginal tax rate (tax payable as % of actual dividends) -6.86%

The negative tax amount is not refundable - it can only be used to offset other taxes payable.

In Ontario there will only be a negative tax rate in the lowest tax bracket when the addition of the dividends don't increase the Ontario Health Premium, and don't reduce or eliminate the Ontario tax reduction.  The tax reduction is based on provincial taxes payable, not taxable income, so if the provincial taxes are reduced by the dividend tax credit, this could generate a low income tax reduction, increasing the negative tax rate.

In order to not be affected by the Ontario Health Premium, the dividends would have to keep the taxable income within the same health premium "bracket".  With a taxable income of $25,000 before dividends, up to $11,000 of grossed-up eligible dividends ($7,971 of actual dividends) could be added without increasing the $300 health premium.  In this case, the dividend tax credits would be $2,027 federal and $1,100 Ontario, and the Ontario tax would be reduced to zero by the low income tax reduction of $212.  The total tax would be $759 less than the tax on $25,000, or a savings of 9.52% ($759/7,971).  The additional 2.66% (9.52% - 6.86%) is a result of the low income tax reduction of $212, which is not available when the taxable income is $25,000 with no dividends.

The only provinces where there is no negative marginal tax rate in the lowest tax bracket are Manitoba, Newfoundland & Labrador, and Quebec.  However, the negative rate is very low in some provinces, as can be seen in the table below.

Marginal Tax Rate Eligible Dividends
For the Lowest Tax Bracket
Combined Federal/Provincial Rate

Province

2017

2016

Alberta -0.03% -0.03%
BC -6.84% -6.84%
Manitoba 3.84% 3.84%
New Brunswick -5.99% -5.30%
Newfoundland & Labrador 4.53% 3.84%
Northwest Territories -7.76% -7.76%
Nova Scotia -0.11% -0.11%
Nunavut -2.11% -2.11%
Ontario -6.86% -6.86%
Prince Edward Island -0.99% -0.99%
Quebec 5.64% 5.64%
Saskatchewan -0.03% -0.03%
Yukon -11.89% -11.89%

For BC, the above negative rate is only achieved when the outcome is not affected by the low income tax reduction and the MSP premiums.  For a single person, there is a low income tax reduction when taxable income is under approximately $31,600 in 2016.  Full MSP premiums are paid when adjusted net income (single person or couple) is over $30,000.

See the tables of marginal tax rates for your province/territory to find your own marginal tax rate for dividends.

Tax Tip:  Dividends from Canadian public companies may reduce your taxes payable.

Revised: September 19, 2017

 

 

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