All the rage and mania in the markets during the first half of 2026 has been anything tied to AI, and IPOs of some of the world’s seemingly largest companies by market cap. If you’re a so called “value investor” or hold a wide range of profitable, growing, and undervalued companies in your portfolio, chances are you’ve probably underperformed the S&P500 this year.
While it might give you fomo watching current chip sector high flyers like INTC, SNDK, and MU go up double digit percentages every day, the reality is that consistently profitable growing businesses with stable underlying fundamentals at attractive valuations do well over the long term. While the long-term capital appreciation of a stock is ideal, investors can also benefit from generated cash flow in their portfolio via dividends over the same time frame. Not all companies pay them, but some companies pay dividends to reward investors for holding their company’s stock. Dividends are one way that companies return value to shareholders. Some companies prefer to return leftover cash (or accumulated net income let’s say) back into the business to pay down debt, buy back shares, optimize existing operations, or fuel growth via M&A or organic growth. Both mechanisms “return value” to shareholders, but one is more direct and immediate versus the other.
While dividends can provide investors with consistent income within their portfolio, there are difference as to how dividends are taxed between Canada and the US, as well as the type of account those dividends are paid into. Let’s first look at the differences in dividend taxation between Canada and the US.
Dividend Taxation: Canada
In Canada, dividends are classified as either eligible or non-eligible. Eligible dividends are typically paid by large, publicly traded Canadian corporations and are taxed more favorably. They are "grossed up" by 38% (meaning you add 38% to the actual dividend received when reporting income), but you then receive a federal dividend tax credit to offset double taxation at the corporate and personal level. Non-eligible dividends (from smaller or private Canadian corporations) are grossed up by 15% and also receive a smaller tax credit (turbotax).
The effective tax rate on eligible dividends is generally much lower than for interest income or foreign dividends, especially after applying the dividend tax credit. Dividends from foreign companies (like US stocks) do not qualify for the dividend tax credit and are taxed as regular income at your marginal rate.
Dividend Taxation: United States
In the US, dividends are classified as either qualified or ordinary (nonqualified). Qualified dividends (from US corporations and certain foreign corporations, held for a required period) are taxed at the preferential long-term capital gains rates: 0%, 15%, or 20%, depending on taxable income. Ordinary dividends are taxed as regular income at rates up to 37% (Nerd Wallet). Most US-listed common stocks pay qualified dividends if holding period requirements are met.
I’ve summarized the comparison of dividend treatment between Canadian and American corporations in Table 1:
|
Aspect |
Canada |
United States |
|
Dividend Types |
Eligible, Non-eligible |
Qualified, Ordinary (Nonqualified) |
|
Preferential Rate |
Yes (via gross-up & dividend tax credit) |
Yes (qualified: 0%, 15%, 20%) |
|
Foreign Dividends |
Taxed as regular income, no dividend tax credit |
Usually ordinary, unless from qualified sources |
|
Highest Tax Rate |
Up to ~29% for dividends |
Up to 37% (ordinary), 20% (qualified) |
Canadian Dividend Tax Credit Calculation Example
This example from TurboTax shows how to calculate the dividend tax credit for eligible and non eligible dividends in Canada.
Let’s start with an eligible dividend of $500. First, you’ll have to “gross up” your dividends to represent the corporation’s profit before taxes. This is because they were already taxed on the profits before you received them as dividends.
To do this, multiply your amount by 38% and add that to your total.
$500 x 0.38 = $190.
$190 + 500 = $690.
In this example, let’s say your marginal tax rate is 30%. Then, you’d take that $690 and multiply it by 0.30 to get a tax bill of $207.00. Finally, multiply the grossed-up dividend of $690, by the federal dividend tax credit rate of 15%, to get $103.64 ($690 x 0.15 = $103.50).
This is the value of your federal tax credit. In the end, your tax bill comes out to $103.50 ($207.00 - $103.50).
For noneligible dividend, let’s use $500 again. Gross it up using the 15% noneligible dividend rate ($500 x 0.15= $75), and you’d be sitting at $575 ($500 +$75). Assuming the same marginal tax rate of 30%, your tax bill would be $172.50 ($575 x 0.30). Then, you’d multiply that $575 by the federal dividend tax credit rate of 9% for noneligible diviends, to get a federal tax credit of $51.75 ($575 x 0.09 = $51.75). So, your tax bill would end up at $120.75 ($172.50-$51.75).
You can see that your tax bill is higher for a noneligible dividend of $500 ($120.75) versus an eligible dividend of the same amount ($103.50). Hence, stocks paying eligible dividends are preferred, especially in accounts where dividends are subject to tax like non registered accounts. So which type of account should you hold dividend paying stocks in?
Optimal Accounts to Hold Dividend Stocks
Long story short, dividend stocks are better held in registered accounts in Canada such as the TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan).
TFSA: Dividends (Canadian or foreign) earned in a TFSA are completely tax-free—no tax on income or withdrawals. However, US dividends in a TFSA are subject to a 15% US withholding tax that cannot be recovered. Because the IRS does not recognize the TFSA as a registered retirement account under the Canada-U.S. tax treaty, it automatically deducts 15% from any U.S. dividends paid into the account (Scotia Wealth Management)
RRSP: Dividends earned in an RRSP are tax-sheltered until withdrawal. US dividends in an RRSP are not subject to US withholding tax, thanks to a Canada-US tax treaty (Moneysense).
Non-registered accounts: Dividends are taxed annually according to the rules above, and foreign dividends face both withholding and Canadian tax.
Ultimately, using registered accounts to hold dividend paying stocks shelters the dividends from annual taxation. Dividends inside a TFSA or RRSP grow without being taxed each year, which maximizes compounding over the long term. Dividends inside registered accounts also help simplify tax reporting, as there’s no need to track or report dividend income annually for investments held in registered accounts. Your CPA will love you for this.
Based on what we’ve discussed, for optimal placement of dividend paying stocks, my recommendation for Canadian investors is the following:
Canadian dividend stocks: TFSA or non-registered (to use the dividend tax credit)
US dividend stocks: RRSP (to avoid US withholding tax)
Avoid holding US dividend stocks in a TFSA due to unrecoverable withholding tax
You don’t need to perfectly optimize everything in life, including your portfolio, nor should you. We’re not perfectly coded robots, and everything in life doesn’t need to be “mathematized” (it’s admittedly hard for me to say this being a structured thinking engineer). However, making small tweaks to your portfolio to optimize tax treatment of dividends goes a long way in preserving compounding of your investments. And that surely will pay you dividends over the long term (pun intended).