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Eligible vs Non Eligible Dividends in Canada

tax accountant canada

In Canada, eligible and non-eligible dividends refer to the different tax treatment of dividends received from Canadian corporations. The key distinction lies in the source of the funds used to pay the dividends. Lets find difference in Eligible vs Non Eligible Dividends;

  1. Eligible Dividends:
    • Eligible dividends are paid out of a corporation’s earnings that have been taxed at the general corporate tax rate. This means the company has paid taxes at the higher corporate tax rate before distributing dividends to shareholders.
    • These dividends receive preferential tax treatment for individuals. They are taxed at a lower rate than non-eligible dividends.
    • Eligible dividends are grossed-up by 38% for tax purposes, which means the actual taxable amount is higher than the dividend received.
    • The grossed-up amount is then offset by a dividend tax credit, which reduces the overall tax liability of the individual.
  2. Non-Eligible Dividends:
    • Non-eligible dividends (formerly known as “ordinary” dividends) are paid out of a corporation’s earnings that have been taxed at the lower small business tax rate.
    • These dividends do not receive the same preferential tax treatment as eligible dividends.
    • Non-eligible dividends are grossed-up by 15% for tax purposes, which means the taxable amount is higher than the dividend received.
    • Like eligible dividends, they also have a dividend tax credit to reduce the overall tax liability.

The tax treatment of dividends is important for individual investors, as it affects the amount of tax they will owe on the dividend income they receive. It’s worth noting that the tax rates and regulations are subject to change, so it’s advisable to consult a tax professional or refer to official government sources for the most up-to-date information.

Talk to Abdullah CPA for the specialized advice.

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