How is dividend income from Canadian stocks taxed differently from interest in Ontario?

Interest income is included in your taxable income at 100% of the amount received and taxed at your full marginal rate. Dividends from Canadian corporations are taxed differently — there is a dividend gross-up and dividend tax credit mechanism that reduces the effective tax rate to reflect that the corporation already paid corporate tax on the income before distributing it.

Eligible dividends from large, publicly traded Canadian corporations receive a higher gross-up and a larger federal and provincial dividend tax credit. Non-eligible dividends (typically from Canadian-controlled private corporations) receive a smaller gross-up and credit. In both cases, your T5 slip from the financial institution shows both the actual dividend and the grossed-up amount you include in income.

Ontario has its own provincial dividend tax credit rates that are applied against Ontario income tax after the federal credit is taken. The net effect is that eligible Canadian dividends are taxed at a meaningfully lower effective rate than interest income for most Ontario earners — though the exact rate depends on your total income. Capital gains, with only 50% of the gain included in income, have their own rate structure as well.