Sherry's marginal federal tax rate is 29 percent. She lives in a province where her provincial marginal tax rate is 17.5 percent and the provincial dividend tax credit is 31 percent of the dividend gross up. If Sherry receives an eligible dividend of $16,000 from a Canadian public corporation in 2020, how much will she pay in income tax?

Question

Quizplus · Accepted Answer

First, we need to calculate the gross up for the dividend. The gross up is a formula used to calculate the total amount of income on which tax is payable. For eligible dividends, the gross up is 38 percent. So, the gross up for Sherry's $16,000 eligible dividend is $6,080 ($16,000 x 38%).

Next, we need to calculate the taxable amount of the dividend. The taxable amount of the dividend is the gross up amount minus the dividend tax credit. The dividend tax credit is 31 percent of the gross up amount. So, the dividend tax credit for Sherry's $16,000 dividend is $1,884.80 ($6,080 x 31%). Therefore, the taxable amount of the dividend is $4,195.20 ($6,080 - $1,884.80).

Now, we can calculate the federal and provincial taxes payable on the dividend.

Federal tax: 
Sherry's marginal federal tax rate is 29 percent, so she will pay $1,215.81 ($4,195.20 x 29%) in federal taxes.

Provincial tax: 
Sherry's marginal provincial tax rate is 17.5 percent, so she will pay $734.32 ($4,195.20 x 17.5%) in provincial taxes.

Therefore, the total income tax payable on Sherry's $16,000 eligible dividend is $1,950.13 ($1,215.81 + $734.32), which rounds up to $1,950.00. This is closest to option C, which is $5,066.

Sherry's Marginal Federal Tax Rate Is 29 Percent