Understanding Taxable Dividends: A Small Business Owner’s Guide to T5s

What is the difference between actual and taxable dividends? Some insight on common questions that small business owners often have about T5s.

As a small business owner, navigating the world of corporate dividends can feel like learning a new language. One of the most common sources of confusion is the difference between actual and taxable dividends, especially when it comes to T5 reporting.

Understanding Taxable Dividends: A Small Business Owner's Guide to T5s

Actual vs. Taxable Dividends: Breaking It Down

Actual dividends represent the real cash amount your corporation distributes to shareholders. However, taxable dividends are what you’ll see on your T5 slip – and they’re typically higher than the actual amount received. Why? The amount is “grossed up” to account for corporate taxes already paid.

Types of Dividends That Impact Your Taxes

Eligible Dividends:

  • Come from corporate income taxed at the higher corporate rate
  • Receive preferential tax treatment for shareholders
  • Have a gross-up rate of 38%

Non-Eligible Dividends:

  • Typically from small business income taxed at lower rates
  • Have a lower gross-up rate of 15%
  • Result in higher personal taxes

Common T5 Questions Answered

Why is my T5 amount higher than what I received?
The gross-up mechanism ensures fair tax treatment, considering both corporate and personal taxes. Think of it as “reversing” the corporate tax to show the original income.

When should dividends be reported?
Report dividends in the tax year they’re received, not when they’re declared. Keep clear records of payment dates for accurate reporting.

Can I choose between eligible and non-eligible dividends?
Your corporation’s tax status and income source typically determine this. Consult your accountant to optimize your dividend strategy.

Smart Planning Tips

  1. Keep detailed records of all dividend payments
  2. Understand your corporation’s dividend-paying capacity
  3. Consider timing of payments for tax efficiency
  4. Review eligible dividend status before distribution
  5. Maintain clear communication with your accountant

Remember, proper dividend planning can significantly impact both corporate and personal tax positions. When in doubt, seek professional advice to optimize your dividend strategy. Contact IDM to set up a consultation.