A dividend is a distribution of a corporation's after-tax profits to its shareholders, taxed at preferential personal rates through the dividend tax credit.
Dividends are one of the two main ways an owner takes money out of a corporation, the other being salary. They are paid from income the company has already paid corporate tax on, and are not deductible to the company. In the shareholder's hands they are taxed at lower rates than regular income because of the dividend tax credit, which accounts for the tax the corporation already paid.
Canada distinguishes eligible dividends (from income taxed at the general corporate rate) and non-eligible dividends (from income taxed at the small business rate), each with its own gross-up and credit. Dividends paid to family members can be caught by the TOSI rules.
Your corporation pays $50,000 in dividends to you from its after-tax retained earnings. You report the grossed-up amount on your personal return and claim the dividend tax credit, resulting in less personal tax than the same $50,000 taken as salary.
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