What Is Dividend Tax Credit?
A dividend tax credit is one way of stimulating stock investments. A government issues such a credit to individuals who have to pay taxes on dividend payments they get on equity stock investments.
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Definition
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A dividend tax credit is a credit given by a government to a taxpayer to reduce the amount of tax payable on dividends. The Canadian government provides such a credit.
How It Works
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In the Canadian system, the individual receiving a dividend hikes up the dividend amount he received by 25 percent on his tax return. And in calculating the tax due on this dividend, he is able to offset a part of the tax payable with the credits issued by the state and federal governments. He ends up paying less tax on the dividend than he would have without the tax credit.
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Benefits
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Corporations pay dividends out of income they have already paid taxes on. So by taxing dividends at the individual level too, the government is taxing the same money twice. Dividend tax credits help avoid double taxation.
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