Eligible vs Non-Eligible Dividends: How Canadian Corporation Dividends Are Taxed

If you’re an owner-manager of a Canadian corporation deciding how to pay yourself, understanding the difference between eligible and non-eligible dividends is essential. The type of dividend you receive affects your personal income tax bill significantly, and getting corporate tax planning right can save you thousands. This guide explains how each type works, when your corporation can pay them, and how to report them correctly on your tax return.

Key Takeaways

• Eligible dividends come from corporate income taxed at the general corporate tax rate (roughly 23% to 31% combined)
• Non-eligible dividends are paid from income taxed at the small business rate (roughly 9% to 12.5% combined)
• Eligible dividends receive a higher dividend tax credit, so they result in less tax at the personal level
• Your CCPC tracks its ability to pay eligible dividends through the General Rate Income Pool (GRIP)
• Non-eligible dividends are associated with the Low Rate Income Pool (LRIP)
• Exceeding GRIP triggers a 20% penalty. Verify your balance before paying
• Both types must be designated when paid. The designation is permanent
• Report all distributions on your T5 slip using the correct boxes

What Is a Dividend?

A dividend is a distribution of after-tax corporate profits to a shareholder. Unlike salary, it’s not a deductible expense for the corporation. Your company pays corporate tax first, then distributes what remains to you as an owner. (Dividends aren’t the only way to access corporate funds: shareholder loans are another option worth understanding.)

When you receive a distribution from a Canadian corporation, the Canadian tax system uses a mechanism called the dividend tax credit to prevent double taxation. The idea is that the total tax paid (corporate plus personal) should be roughly the same as if you had earned the money directly as personal income through a tax concept of “integration”.

However, not all distributions are treated equally. The tax treatment depends on whether the payment is classified as eligible or non-eligible. This classification flows from the corporate rate that was paid tax on before the distribution.

Decision rule: If you want to extract cash from your company without triggering CPP contributions or payroll administration, distributions are often appealing, but which type you can pay depends on your corporation’s income history.

The Difference Between Eligible and Non-Eligible Dividends

Understanding the difference between eligible and non-eligible distributions comes down to one question: what corporate rate was applied to the income before it was distributed?

Key differences between eligible and non-eligible types: Because eligible distributions come from income that faced a higher corporate rate, you receive an enhanced dividend tax credit to compensate. This results in a lower personal rate on eligible payments compared to non-eligible ones of the same cash amount.

Through integration our tax system is designed so that the overall tax burden remains similar whether you earn income personally or through a corporation. However, perfect integration rarely occurs in practice, and the actual outcome depends on your province and marginal bracket.

How Dividends Are Taxed in Canada

Dividends are taxed differently than regular employment income. The Canadian tax system uses a two-step mechanism:

1. Gross-up: You add a percentage to the actual amount of dividends received. This approximates the pre-tax corporate income.
2. Credit: You then receive tax credits that approximate the corporate tax already paid.

This approach attempts to achieve “integration”: the idea that income should bear roughly the same overall tax whether earned personally or through a corporation.

Why Are There Two Types?

Canada has two main corporate rates:

• The general corporate rate applies to large corporations and CCPCs on income above the small business deduction limit
• The small business rate applies to Canadian-controlled private corporation (CCPC) active business income eligible for the small business deduction (if you’re considering incorporating in Ontario, understanding these rates is essential)

Because these corporate rates differ substantially, the personal credits must also differ. Otherwise, income taxed at a lower rate at the corporate level would receive an inappropriately large personal credit.

Result: Eligible distributions (from general-rate income) get a higher tax credit. Non-eligible distributions (from small business rate income) get a lower dividend tax credit.

The Gross-Up and Dividend Tax Credit

The gross-up and credit mechanism is central to understanding how distributions are taxed. Here’s how it works for each type:

Eligible Distributions

• Gross-up rate: 38%
• Federal credit: 15.0198% of the taxable (grossed-up) amount

For a $1,000 eligible payment:

• Taxable amount: $1,000 × 1.38 = $1,380
• Federal credit: $1,380 × 15.0198% = $207.27

Non-Eligible Distributions

• Gross-up rate: 15%
• Federal credit: 9.0301% of the taxable (grossed-up) amount

For a $1,000 non-eligible payment:

• Taxable amount: $1,000 × 1.15 = $1,150
• Federal credit: $1,150 × 9.0301% = $103.85

Provincial credits also apply, and rates vary by jurisdiction. Together, the federal and provincial credits offset a portion of the personal tax owing.

Decision rule: If you’re in a lower bracket, the credits can sometimes exceed your liability, resulting in taxed more favourably than non-eligible income or even negative effective rates. This is more common with eligible payments due to the enhanced dividend tax credit.

When Can a Corporation Pay Eligible Dividends?

Not every corporation can pay eligible distributions. Whether you can pay eligible dividends depends on the type of income your company has earned and the corporate rate applied to it.

Corporations That Generally Pay Eligible Distributions

• Public corporations: Almost always pay eligible distributions
• CCPCs on general-rate income: Active business income above the small business limit ($500,000 federally)
• CCPCs on investment income: Passive income taxed at the general corporate rate (subject to refundable rules). This is common in holding company structures

The GRIP Account

Your corporation tracks its ability to pay eligible distributions through the General Rate Income Pool (GRIP). This notional account increases when:

• Your corporation earns income taxed at the general corporate rate
• You receive eligible distributions from other corporations
• Certain adjustments occur on amalgamation or wind-up

You can only designate distributions as eligible up to your GRIP balance. Eligible dividends are paid by reducing GRIP.

Decision rule: Before paying yourself, check your corporation’s GRIP balance with your accountant. If you designate distributions as eligible when you don’t have sufficient GRIP, you’ll face a penalty under Part III.1 of the Income Tax Act (ITA).

Non-Eligible Dividends in Canada: When They Apply

Most owner-managers of small CCPCs will primarily receive non-eligible distributions. This happens because their corporate income is taxed at the small business rate rather than the general rate – the higher rate.

When Non-Eligible Distributions Are Standard

• Your CCPC earns active business income under $500,000 (eligible for the small business deduction)
• Your corporation has no GRIP balance from other income sources
• You’re extracting profits from typical small business tax-rate income

The LRIP Account

The Low Rate Income Pool tracks income taxed at the small business rate. For most CCPCs, active business income flows into this pool. Non-eligible dividends are paid from this income.

Non-eligible dividends are taxed at a higher personal rate than eligible ones because the lower corporate rate means less tax was paid at the corporate level.

Decision rule: If your CCPC’s only income is active business income under the small business limit, your distributions will be non-eligible unless you have GRIP from prior years or other sources.

Eligible vs Non-Eligible: Tax Comparison

Here’s how the two types compare when you receives dividends of $10,000 in Ontario, assuming the highest tax bracket (2025 rates):

Key insight: On the same $10,000 cash distribution, eligible payments result in approximately $1,070 less personal tax at the top marginal bracket. The favourably than non-eligible treatment reflects the higher corporate rate already paid.

At lower income levels, the difference narrows, and sometimes non-eligible distributions can be more tax-efficient when considering overall integration with corporate-level taxes.

Reporting on Your T5 Slip

When your corporation pays distributions, it must issue a T5 slip to you (the shareholder) and file with the Canada Revenue Agency. The boxes differ depending on the type:

Eligible Payments

Non-Eligible Payments

Reporting Eligible and Non-Eligible Dividends on Your Return

When you file your personal return:

1. Report the taxable amounts on Schedule 4 and transfer to Line 12000 (or 12010 for eligible)
2. Claim the federal credit on Line 40425
3. Claim the provincial credit on your provincial Form 428

Decision rule: The designation must occur when distributions are paid. Document it in a board resolution. You cannot change the designation after the fact.

Salary or Dividends: How the Choice Affects You

Owner-managers often wonder whether paying yourself dividends or salary is better. The answer depends on several factors:

When Salary May Be Preferred

• You want to maximize RRSP contribution room (requires earned income)
• You want CPP retirement benefits (dividends don’t count toward CPP)
• You need to deduct childcare expenses (requires earned income)
• Integration doesn’t work perfectly in your province/bracket

When Distributions May Be Preferred

• You want to avoid CPP contributions and payroll administration
• Your personal rate is low enough that credits eliminate most liability
• Your corporation has retained earnings and you want flexibility
• You’re past your CPP contribution years

The Integration Question

In theory, paying yourself dividends vs salary should yield similar after-tax results due to integration. In practice, gaps exist because:

• Corporate and personal rates don’t align perfectly
• Provincial rates vary substantially
• The small business rate creates a deferral advantage

Decision rule: There’s no universal answer for salary or dividends. The optimal mix depends on your personal situation, provincial rates, and goals. A tax planning consultation can help you model the numbers for your specific situation.

Common Mistakes to Avoid

• Designating as eligible without sufficient GRIP: Triggers a 20% Part III.1 penalty; the excess is recharacterized
• Forgetting to designate: Undesignated payments default to non-eligible
• Using wrong T5 boxes: Leads to CRA reassessment and confusion
• Assuming all corporate payments are the same: The treatment differs significantly
• Not tracking GRIP and LRIP annually: Creates designation errors and penalties
• Paying from a corporation with no retained earnings: May not have sufficient equity
• Ignoring provincial credit differences: Your total liability varies by province
• Trying to change designation after payment: It’s permanent once made

Action Checklist

• [ ] Review your corporation’s GRIP balance with your accountant
• [ ] Determine whether eligible or non-eligible designation is appropriate
• [ ] Pass a board resolution documenting the declaration and type
• [ ] Prepare T5 slips using correct boxes for each type
• [ ] Issue T5 slips to shareholders by the last day of February following the tax year
• [ ] File T5 Summary with CRA
• [ ] Report distributions on your personal return
• [ ] Track GRIP and LRIP balances annually in corporate records
• [ ] Consider the salary or dividends mix with your CPA for tax efficiency

FAQ

What’s the difference between eligible and ineligible dividends?

Eligible distributions come from income that was taxed at the general corporate rate (roughly 23% to 31%). Non-eligible (sometimes called “ineligible”) distributions come from income taxed at the small business rate (roughly 9% to 12.5%). You also receive a different credit for each type: eligible ones get a higher credit that results in lower personal liability.

Can I pay both types in the same year?

Yes. If your corporation has both GRIP (from general-rate income) and LRIP (from small business income), you can pay a mix. Each portion must be properly designated and reported in the correct T5 boxes.

What happens if I exceed my GRIP balance?

You’ll face a Part III.1 penalty of 20% on the excessive eligible amount. The excess is also treated as non-eligible for the recipient. You can elect to treat the entire payment as non-eligible to avoid the penalty if you catch the error early.

Do I need to withhold personal tax on payments to Canadian shareholders?

No. Distributions to Canadian resident shareholders don’t require withholding. The shareholder reports the income is taxed on their personal return. Non-resident shareholders may be subject to withholding.

Are public company distributions always eligible?

Generally, yes. Distributions from Canadian public corporations are almost always eligible. Your T5 or T3 slip will show amounts in the eligible boxes.

Is taxed at a lower rate always better for eligible payments?

Usually, yes, because of the higher credit. However, the advantage depends on your marginal bracket and province. At lower incomes, the difference is smaller. In some provinces, integration works better for non-eligible payments when considering corporate-level liability.

How do dividends received from other corporations affect my company’s GRIP?

If your corporation receives eligible distributions from another Canadian corporation, those amounts add to your GRIP balance. This allows you to flow through the eligible designation to your own shareholders.

Can I change the designation after the fact?

No. The designation is permanent. Dividends are properly classified at the time of payment. Document your choice in a board resolution to avoid disputes.

Eligible vs Non-Eligible Dividends Calculator