Which statement about the dividend gross-up calculation is TRUE?

The statement that the dividend gross-up calculation increases the taxable amount of the dividend is indeed true. The gross-up mechanism is a tax provision that applies to eligible dividends received by Canadian residents from Canadian corporations. The government recognizes that corporations pay taxes on their profits before distributing dividends to shareholders. To prevent double taxation, the gross-up effectively increases the amount of the dividend reported as income on an individual’s tax return. This results in a higher taxable amount than the actual cash dividend received.

The purpose of the gross-up is to ensure that the tax credit received for the taxes paid at the corporate level adequately reflects the income that individuals are receiving. As a result, while the gross-up increases the taxable income, it is subsequently offset by the dividend tax credit, which can ultimately lead to reduced tax payable when filing.

Understanding this mechanic is key for both tax planning and compliance, especially for individuals investing in Canadian corporations and receiving dividends. It is essential to recognize how the gross-up interacts with the overall tax system in Canada to ensure accurate reporting and maximization of tax benefits related to dividend income.