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In some provinces, you may not have to pay any taxes at all
Note that Canadian dividends will get you a nice tax break at all income levels, but the benefit is especially large if you’re in a lower tax bracket.
Amazingly, if you’re in a low enough tax bracket in some provinces (including B.C.), you not only pay no taxes on dividend income at all, but the dividends cause a further small reduction in the rest of your taxes. This is a rare and delightful example of a “negative marginal tax rate”.
The actual calculations are pretty complex and go through a three-step process. First, dividends received are grossed up and included in taxable income. Second, a percentage tax rate is applied and, third, you receive a dividend tax credit which knocks your net taxes back down. The positive impact of the dividend tax credit is greater than the negative impact of the gross up.
A further complication to consider is that while dividend income is taxed favourably, it hurts you when it comes to income-tested government benefits such as the Old Age Security clawback. That’s because the income test incorporates grossed-up income—step one of the three-part process—not the dividends you actually receive.
Related: How to buy dividend stocks
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