A gross-up is an upward adjustment to a dividend amount on your tax return, designed to reflect the pre-tax corporate income and paired with the dividend tax credit.
Because dividends are paid from income a corporation already paid tax on, Canada's system asks you to report a grossed-up amount, more than the cash you received, to approximate the pre-tax corporate profit. You then claim the dividend tax credit to offset the corporate tax already paid. The two mechanisms work together so the same income is not taxed twice.
Eligible dividends carry a larger gross-up (reflecting general-rate corporate tax) and non-eligible dividends a smaller one. The gross-up is why dividend income can push your taxable income, and income-tested benefits, higher than the cash received would suggest.
You receive a $10,000 eligible dividend. With a 38% gross-up you report $13,800 on your return, then claim the dividend tax credit, so your net tax reflects the corporate tax the company already paid.
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