Dividends are paid out of corporations from after-tax profits. As the company has already paid tax on the amount, taxing the shareholder on the full dividend income would not be reasonable. Hence, in order to prevent this, the gross-up and tax credit system has been created.
Grossing up the dividend converts it to an amount that is pre-corporate tax. Then, the tax credit provided to the shareholder compensates for the tax paid by the corporation on its profits.
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