When a corporation makes a profit, it distributes this to its shareholders and owners in the form of dividends. In most cases, the dividends will be distributed at specific times of the year. Some corporations will choose to do this annually whereas others quarterly. The dividend is a reward paid to shareholders for believing in the corporation and investing in it. Dividends are considered income and for this reason, the shareholders or company owners will need to pay taxes when receiving it.
How Much Taxes Will you Pay on Dividend as a Shareholder
It is required by law that shareholders receive a report that shows how much dividend they are paid for the year if the amount is more than $10. Therefore, as a corporation, you are required to provide the tax authorities with a consolidated report that captures all the dividends that have been paid to shareholders during the previous year by the end of January. Corporations that pay dividends are also required to submit Form 1096 to the tax authorities which compiles all the payments that have been made to its shareholders.
Shareholders on the other hand will report the dividends they have received on their personal tax returns. This is reported on the Capital gains and losses section. This should also be included as part of their income for the year when filing T1 tax returns. The rate at which dividends is taxed will depend on several factors. In most cases, dividends will be taxed as an ordinary income. Though there are other qualified dividends taxed as capital gains. The rules will change if you receive more than $1500 in dividend within a year.
Dividends Received by Company Owners
If you are a company owner, partner or LLC member, you will not receive dividends in the same way as the shareholders of the corporation. The advantage of dividends is that it doesn’t require that you be an employee of the business. But if the only source of personal income to the company owner is dividends then it is possible to receive up to $33,305 tax-free. A tax accountant would be in the best position to advise on the route to take in order to lower taxes when receiving dividends from your corporation.
Avoiding Double Taxation
Dividends can be taxed twice. The first time is when you include them as part of your net income. Remember that dividends are not expenses, therefore, they cannot be considered as a deductible. Therefore, you will pay corporate income tax on all these profits that are distributed to the business’s shareholders. Additionally, the shareholders will also be taxed on the dividends they receive. They pay income tax when filing their T1 returns.
Federal Dividend Tax Credit
If you are a shareholder and earn dividend income, which you are required to report on your tax return, you may get a federal tax credit for this income. This credit can reduce the amount of taxes you have to pay and is usually given to avoid double taxation.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.