Understanding the Difference between Actual Dividends and Taxable Dividends (2024)

Dividends are a common way for companies to distribute profits to shareholders. However, not all dividends are created equal, and understanding the difference between actual and taxable dividends is crucial for both shareholders and businesses.

What are actual dividends?

Actual dividends refer to the substantial amount of money paid to shareholders by a company. This amount is typically reported on a company's financial statements and represents the portion of profits the company has decided to distribute to its shareholders.

What are taxable dividends?

Taxable dividends, however, refer to the portion of the actual compensation subject to taxation. In Canada, tips received from Canadian corporations are eligible for the dividend tax credit, which can reduce the tax owed on the dividend income. The amount of the credit is based on the type of dividend received, with eligible tips generally receiving a higher credit than non-eligible dividends.

It's important to note that not all dividends are eligible for the dividend tax credit. Non-eligible dividends are typically paid by small businesses or private corporations that do not meet specific criteria and are subject to a higher tax rate than eligible dividends.

As a shareholder, it's essential to understand the type of dividend received and its tax implications. As a business owner, it's necessary to understand the tax implications of different types of dividends when deciding how to distribute profits to shareholders.

In summary, actual dividends represent the amount of money paid to shareholders by a company, while taxable dividends are the portion of the substantial dividend subject to taxation. Understanding the difference between eligible and non-eligible dividends and their tax implications is essential for both shareholders and businesses. Consult with a qualified tax professional to ensure compliance with Canadian tax laws.