CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
3.4 Taxation of Individuals on Shares in Closely Held Corporations Dividends From Private Corporations Three types of dividends can be paid by a corporation resident in Canada in favour of an individual resident in Canada: • eligible dividends (dividends paid by a corporation taxed at the 15% rate); • non-eligible dividends (dividends paid by a corpo - ration taxed at the 9% rate); and • capital dividends. At the federal level, if an individual receives an eligi - ble dividend, a grossed-up amount equal to 138% of the dividend is included in computing the individual’s income and the individual is allowed a dividend tax credit equal to 15.02% of the grossed-up amount, the whole resulting in an eligible dividend being taxable in the hands of an individual at a top federal marginal tax rate of 24.81%. At the federal level, if an individual receives a non- eligible dividend, a grossed-up amount equal to 115% of the dividend is included in computing the individ - ual’s income and the individual is allowed a dividend tax credit equal to 9.03% of the grossed-up amount, the whole resulting in a non-eligible dividend being taxable in the hands of an individual at a top federal marginal tax rate of 27.57%. Eligible and non-eligible dividends are also taxable at the provincial level. A capital dividend is a dividend paid by a corporation out of its capital dividend account (which is essentially composed of the non-taxable portion of capital gains realised by the corporation) and is not taxable in the hands of the individual. Gain on the Sale of Shares in Private Corporations 50% of a capital gain realised by an individual is tax - able at the individual’s applicable federal and provin - cial income tax rate, including a capital gain realised on shares of a private corporation. This results in an effective federal marginal tax rate for capital gains of 16.5% and an effective total marginal tax rate for capi - tal gains of between 22.25% and 27.40%, depend -
ing on the applicable provincial rate (see 2.7 Capital Gains ). An eligible individual resident in Canada is entitled to a lifetime capital gains exemption on gains real - ised on the disposal of qualified small business cor - poration shares. If the capital gain realised by the individual qualifies under these rules, the capital gain – up to the limit – will be exempt from income tax. The lifetime capital gains exemption limit was increased to CAD1,250,000 in 2024–2025 and is to be indexed annually. Therefore, the limit should be set at CAD1,275,000 for 2026, based on the federal indexing factor of 2%. 3.5 Taxation of Individuals on Shares in Public Corporations Dividends From Publicly Traded Corporations Dividends received from a Canadian public corpora - tion are considered eligible dividends. Therefore, at the federal level, a grossed-up amount equal to 138% of the dividend is included in computing the individu - al’s income and the individual is allowed a dividend tax credit equal to 15.02% of the grossed-up amount, the whole resulting in an eligible dividend being taxable in the hands of an individual at a top federal marginal tax rate of 24.81%. Dividends received from a company resident in anoth - er country are not subject to the gross-up or the divi - dend credit. The entire dividend amount is taxable in Canada and may be subject to withholding in the other country. Gain on the Sale of Shares in Publicly Traded Corporations 50% of a capital gain realised by an individual is tax - able at the individual’s applicable federal and provin - cial income tax rate, including a capital gain realised on shares of a publicly traded corporation (see 2.7 Capital Gains ). 4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes Canada imposes a 25% federal withholding tax on certain types of passive income from Canadian sourc -
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