Question

D, an individual, received $20,000 of eligible dividends from Canadian corporations in the current year. What amount is included in D's net income for tax purposes for the current year?

Answer 1

For tax purposes, the amount included in D's net income from $20,000 of eligible dividends would be grossed up according to the prevailing gross-up rate for the year. This grossed-up amount is then reported as income before the dividend tax credit is applied.

Step-by-step explanation:

When calculating the amount to be included in D's net income for tax purposes, eligible dividends from Canadian corporations must be grossed up to reflect the pre-tax amount. In current Canadian tax law, there is a specific percentage used for the gross-up of eligible dividends which is applied before the dividend tax credit is calculated. These measures ensure that income from dividends is taxed in a similar way to other types of income, after considering the corporate tax that has already been paid on the earnings before they were distributed as dividends.

For example, if an individual received $20,000 in eligible dividends and the gross-up rate for the year is 38%, the individual would report $27,600 (which is $20,000 plus 38% of $20,000) in their net income. Subsequently, the appropriate dividend tax credit would be applied to avoid double taxation on this income.