How do eligible and non-eligible dividends differ in their tax treatment?

Eligible and non-eligible dividends primarily differ in their tax treatment for the recipient. Eligible dividends receive an enhanced dividend tax credit, which results in a lower personal income tax rate. In contrast, non-eligible dividends have a less favorable tax credit, leading to a higher personal tax rate.

How do eligible and non-eligible dividends influence an individual's personal tax obligations?

Eligible dividends generally result in a lower personal tax burden for individuals because they qualify for an enhanced dividend tax credit. Conversely, non-eligible dividends lead to a higher personal tax liability due to a less favorable tax credit. Understanding this distinction is vital for effective tax planning.

What criteria determine a corporation's distribution of eligible versus 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 subject to the general corporate tax rate typically distribute eligible dividends, while those utilizing the small business deduction commonly issue non-eligible dividends.

How can a corporation determine if it is distributing eligible or non-eligible dividends?

A corporation's income source and tax treatment primarily determine whether it distributes eligible or non-eligible dividends. Generally, corporations paying tax at the general corporate rate distribute eligible dividends. Conversely, those benefiting from the small business deduction commonly issue non-eligible dividends.

Eligible Non Eligible Dividends And Their Tax Impact

Understand how eligible non eligible dividends affect personal tax rates. Learn the differences and their impact on your tax obligations.

Understanding Eligible vs. Non-Eligible Dividends with KWB

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.

What Are 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.

What Are Non-Eligible Dividends and How Are They Taxed?

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

If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.

Thanks to Darren Buma of KWB Chartered Professional Accountants for providing this content.

Eligible Non Eligible Dividends And Their Tax Impact

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Understanding Eligible vs. Non-Eligible Dividends with KWB

What Are Non-Eligible Dividends?

What Are Non-Eligible Dividends and How Are They Taxed?

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