Understanding the Taxation of Dividends in the TFSA (2024)

FAQs

Understanding the Taxation of Dividends in the TFSA? ›

One of the significant benefits of the TFSA is that any investment income, including dividends, earned within the account is tax-free. This means that you don't have to report dividend income earned in a TFSA on your tax return or pay taxes on it.

Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable either while held in the account or when withdrawn.

Please note that I can only provide you with general legal information here, not legal advice. There is no lawyer-and-client relationship established. No, income earned within the TFSA, such as dividends or interest, does not count towards your contribution limit.

The goal of the strategy is to buy stocks that provide a high level of dividend income. Dividends are money companies pay out to their shareholders, usually monthly or quarterly, as a share of their net income. A reasonable aim is to earn an income of 5% a year on the total amount you've invested.

Eligible dividends are those where the corporation has paid a higher tax rate. If your dividend is eligible, you must add back 38% of your received dividend and deduct 15.0198% from the gross taxable amount as a federal dividend tax credit.

Note: Dividends are received in cash to the same account your stock lives in. For example, if you hold stock XYZ in your TFSA, you'll receive the cash dividend to the same TFSA account.

Holding cash in a TFSA

That means one thing: they're no place for cash. If you're only using your TFSA to hold cash, you could be missing out on tax savings that come from investments that grow in value over time tax-free. Instead, talk to an advisor about other higher return investments that you can hold in your TFSA.

Non-eligible dividends — taxed less favourably. These are paid out by Canadian private corporations (small businesses) that pay corporate tax at a lesser rate. You get a lower dividend tax credit on non-eligible dividends to reflect the fact that the small business paid less corporate tax.

No. Even though the IRS doesn't recognize the tax shelter of a TFSA for dividends, they do recognize it for the Registered Retirement Savings Plan (RRSP). If you earn dividends on U.S. stocks in an RRSP, you won't pay a withholding tax.

Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.

Do dividends get taxed if reinvested? ›

Dividends from stocks or funds are taxable income, whether you receive them or reinvest them. Qualified dividends are taxed at lower capital gains rates; unqualified dividends as ordinary income. Putting dividend-paying stocks in tax-advantaged accounts can help you avoid or delay the taxes due.

Gross-up rate for eligible dividends is 38%, and for non-eligible dividends is 15%. For more information see dividend tax credits.

If you choose to reinvest any distributions by buying more units or shares, you may not actually receive the income shown on your information slips. However, you must still report on your income tax and benefit return the amounts shown on your slips.

How are eligible dividends taxed in Canada? The tax rate for eligible dividends includes something called a “gross-up.” This means that dividends are added to your income at an amount slightly higher than what was actually received and are paid with after-tax dollars. Eligible dividends are grossed-up by 38%.

Investors pay taxes on the dividend the year it is announced, not the year they are paid the dividend.

Key Takeaways

All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment. A qualified dividend is taxed at the capital gains tax rate, while ordinary dividends are taxed at standard federal income tax rates.

Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.

AMT starts when the dividends reach $55,002 (2022 $54,403). Federal AMT is applicable for dividends above this amount, until the amount of the dividends reaches $175,218 (2022 $161,215), when the regular federal tax equals or exceeds the minimum amount.

Selling a stock within your TFSA does not count as a withdrawal. Within the shelter of your TFSA, you can sell stocks, bonds, or any other investments without the transaction affecting your contribution room.

Are dividends included in taxable income in Canada? When a shareholder receives a dividend, they must include it in their tax return. Dividends are federal and provincial taxes. The tax component of qualified dividends is taxed at 15.0198 percent, while the tax portion of non-eligible dividends is taxed at 9.031%.