As part of the integration between corporate income taxes and individual taxes, dividends are taxed at a lower rate than income such as salaries. In simple terms, the individual is given credit for income taxes already paid by the corporation on the same income. The method to do this is somewhat complex, but to accomplish this, you must report as income, an amount 38% greater than the actual dividends received but, receive a credit for the extra tax paid on another part of your tax return. The increase in income represents the pre-tax income of the corporation which is paying the dividend. The credit you receive represents the tax already paid by the corporation on that income. There is a difference in the formula for dividends between public company shares and private company shares due to different corporate income tax rates but, with the same idea to integrate personal and corporate income taxes.
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