Simplifying Dividend Taxation in Canada: Eligible vs. Non-Eligible Dividends
Understanding how dividends are taxed in Canada can feel overwhelming—especially when terms like “gross-up,” “tax credit,” and “integration” get tossed around. If you’re a shareholder in a private company or receiving investment income, knowing the difference between eligible and non-eligible dividends can help you plan smarter and avoid paying more tax than necessary.
Let’s break it down clearly.
Eligible vs. Non-Eligible Dividends: What’s the Difference?
There are two main types of dividends individuals may receive:
Eligible dividends are typically paid out by larger, publicly traded corporations. These dividends come from corporate income that has already been taxed at the higher general corporate rate.
Non-eligible dividends are issued by small, privately held Canadian companies whose profits were taxed at the lower small business rate (typically under $500,000 in profit).
The tax system treats these differently to account for the level of tax the company already paid before distributing the dividend.
What Happens When You Receive a Dividend?
When you receive a dividend as an individual, the CRA requires you to report more than just the cash amount you received. This is because of the gross-up and dividend tax credit system:
Gross-up: The dividend is increased on your tax return to reflect the income the corporation already paid tax on.
Dividend Tax Credit: You receive a tax credit to offset the grossed-up amount, ensuring you’re not taxed twice on the same income.
Eligible dividends receive a larger gross-up and a larger tax credit. Non-eligible dividends have a smaller gross-up and credit.
The Goal: Integration
Canada’s tax system is designed to prevent double taxation. This is where integration comes in. It ensures you’re not paying significantly more tax on income received through dividends than if you had earned it as regular salary or wages.
The gross-up and tax credit mechanisms work together to achieve this goal—making dividend income, in theory, taxed similarly to other forms of income.
Still Confused? You’re Not Alone
While the system aims for fairness, it isn’t always easy to understand—especially for small business owners trying to figure out whether to pay themselves via dividends or salary.
If you’re unsure how eligible and non-eligible dividends impact your tax planning, or if you're struggling to apply gross-up and tax credit rules correctly, professional guidance can help you avoid costly mistakes and optimize your after-tax income.
Let’s Talk
If dividends are part of your income or compensation strategy, I can help you understand how they work, how they’re taxed, and how to plan around them.
Book a call to simplify your approach to dividend taxation.
Tax Preparation Services Near You (Not Limited to These Areas):
I regularly work with clients in the locations below, but my services are available to many more regions as well.
