What is the key difference between eligible and non-eligible dividends?

The key distinction between eligible and non-eligible dividends is their tax treatment for the recipient. Eligible dividends benefit from an enhanced dividend tax credit, leading to a lower personal income tax rate. Conversely, non-eligible dividends have a less favorable tax credit, resulting in a higher personal tax rate.

What impact do eligible and non-eligible dividends have on an individual's personal tax obligations?

Eligible dividends typically lead to a lower personal tax liability for shareholders due to a more substantial dividend tax credit. Conversely, non-eligible dividends result in a higher personal tax burden as they receive a less favorable tax credit. Understanding these differences is crucial for effective tax planning.

What factors determine whether a corporation distributes eligible or non-eligible dividends?

The classification of dividends as eligible or non-eligible primarily depends on the corporation's income source and its tax treatment. Corporations paying tax at the general corporate rate usually distribute eligible dividends. Conversely, those benefiting from the small business deduction commonly issue non-eligible dividends.

Is it possible for me to determine the type of dividends my corporation distributes?

The classification of dividends as eligible or non-eligible is primarily determined by your corporation's income and tax situation, rather than a direct choice. For instance, income taxed at the general corporate rate typically results in eligible dividends. Conversely, income that benefited from the small business deduction usually generates non-eligible dividends.

Eligible Non Eligible Dividends Explained

Understand the difference between eligible non eligible dividends and their tax implications. Learn how dividends impact your personal and corporate tax situation.

What’s the difference between eligible and non-eligible dividends? What are the implications to you?

Dividends are payments made to shareholders to allocate the earnings of a corporation. There are two types of taxable dividends that a corporation can issue, non-eligible and eligible.

Non-eligible dividends

Non-eligible dividends are sometimes called ordinary, or small business dividends. These are dividends paid by corporations out of earnings that were taxed at low small business rates where taxable income was under $500,000. Businesses with taxable income under $500,000 qualify for the small business tax rate in 2018 of 12%. (10% federal plus 2% Alberta).

As the corporation was able to take advantage of a lower tax bracket, non-eligible dividends are taxed at higher rates personally when received. The rates fluctuate based on whatever personal tax bracket you are in. These dividends are taxed at approximately 10% more than an eligible dividend.

Eligible Dividends

Eligible dividends are paid by corporations out of earnings that were taxed at the higher corporate tax rate where taxable income was greater than the small business deduction limit of $500,000. Eligible dividends can only be paid from a Canadian corporation if they are designated as such by the corporation.

These dividends can only be paid out of the company’s General Rate Income Pool account (GRIP). The GRIP account is based on a complex calculation but includes:

A percentage applied to the company’s taxable income in excess of $500,000
Eligible dividends received by the corporation
Dividends received via an investment portfolio are likely eligible and added to the GRIP

As the company paid a higher tax rate, eligible dividends are taxed at lower rates personally. Eligible dividends cannot exceed the balance in the GRIP account.

For tax rate information, you can visit: http://www.taxtips.ca/taxrates/ab.htm