The Canadian dividend tax credit: Why is it that someone can earn a lot in dividends but pay no/little tax?
from this link: www.taxtips.ca/glossary.htm#Dividend
For an individual with no income other
than taxable Canadian dividends which
are eligible for the enhanced dividend
tax credit, approximately ,000 can
be earned before any federal taxes are
payable
So a person can have no job, just invest in market, earn a ton of money in dividends and pocket all of it without paying tax?
While another person earning that same money through a job has to pay tax?
What is missing here?
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Basically, yes. That doesn't mean that it's easy to do. The government provides a dividend tax credit since an individual takes on more risk to invest in dividend-paying corporations rather than trading their human capital for an income. Thus, for the most part, earned from dividends is taxed much less than earned from income or interest. Finally, note that foreign dividends are not eligible for the dividend tax credit, and are not preferentially taxed.
The profits that the corporation had to earn to be able to pay you "eligible" dividends for the dividend tax credit were already taxed, and at a somewhat high corporate rate, in the case of large public companies with big profits.
The dividend tax credit, which permits an individual to earn a lot from dividends and not pay any personal income tax, essentially recognizes that the profit making up the dividend was already highly taxed to begin with via corporate income tax. It aims to eliminate double-taxation.
FWIW, if you own and run a small private business in Canada and pay yourself a dividend, such dividends are considered "non-eligible", i.e. you don't get as much a benefit from the dividend tax credit, since small business corporate income tax rates are much lower.
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