TaxTips.ca - Negative marginal tax rate for enhanced dividend tax credit

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

Why is there sometimes a negative marginal tax rate for dividends for lower income tax brackets?

This is because the enhanced dividend tax credit rate is higher than the lowest income tax rate in some cases. This means someone in the lowest tax brackets (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 2009		Tax Bracket 1 up to $36,848		Tax Bracket 2 over $36,848 up to $40,726
Combined federal + Ontario tax rate		21.05%		24.15%

Dividends eligible for enhanced dividend tax credit		$100.00		$100.00
Gross-up		45.00		45.00
Taxable dividend		$145.00		$145.00

Federal + Ontario tax (at 21.05% and 24.15%)		$30.52		$35.02
Less dividend tax credits:
Federal	18.966% x $145	$27.50		$27.50
Ontario	7.4% x $145	10.73		10.73
Total dividend tax credits			38.23		38.23
Tax payable on dividends		-$7.71		-$3.21

Marginal tax rate (tax payable as % of actual dividends)		-7.71%		-3.21%

The negative tax amounts can only be used to offset other taxes payable.

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: April 23, 2010

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