Eligible vs. Non-Eligible Dividends

Definition

Canadian-source dividends are reported at a grossed-up amount to approximate the pre-tax corporate income that funded the distribution. The shareholder then claims a dividend tax credit (DTC) that offsets part of the personal tax to integrate corporate and personal tax. Eligible dividends are paid out of corporate income taxed at the general federal rate (roughly 15% federal plus provincial), typically tracked in the GRIP pool. Non-eligible (or "ordinary") dividends come from income that benefited from the small business deduction and is taxed at the lower CCPC rate. Each type uses a different gross-up and DTC rate.

Key rules

• Eligible dividend: 38% gross-up, federal DTC of 15.0198% of the grossed-up amount (about 20.7% of the actual dividend). Reported on Line 12000 via T5 box 25.
• Non-eligible dividend: 15% gross-up, federal DTC of 9.0301% of the grossed-up amount (about 10.4% of the actual dividend). Reported on Line 12000 via T5 box 11.
• The gross-up and DTC are designed to approximate integration: the combined corporate plus personal tax should roughly equal the tax a proprietor would have paid on the same earnings directly.
• A CCPC tracks its GRIP (General Rate Income Pool) and LRIP balances to determine how much can be paid as eligible versus non-eligible. Excessive eligible-dividend designation triggers Part III.1 tax at 20% of the excess (s.185.1).
• Dividends received from foreign corporations are not eligible for the gross-up and credit; they are taxed as ordinary income (subject to any foreign tax credit).
• Dividends do not create RRSP room, do not trigger CPP contributions, and are not insurable for EI.

Example

A BC resident receives a $10,000 non-eligible dividend from her CCPC in 2026.

Actual dividend                 $10,000
Gross-up 15%                     $1,500
Taxable dividend (Line 12000)   $11,500

At 24.22% federal marginal rate:
  Federal tax on $11,500         $2,785
Federal DTC 9.0301% x $11,500   ($1,038)
Federal tax after DTC            $1,747
Plus BC provincial tax and BC DTC separately

An eligible dividend of the same $10,000 would add $13,800 to taxable income but attract a much larger combined federal and provincial DTC, typically producing a lower effective personal tax rate on the dividend.

Common mistakes

• Designating eligible dividends without sufficient GRIP. The Part III.1 tax is punitive at 20% of the excess (30% if intentional).
• Issuing T5 slips with the wrong box, mixing up eligible and non-eligible amounts.
• Forgetting that dividends do not create earned income for RRSP or maternity/parental benefits.
• Assuming provincial DTC rates match federal. They vary significantly by province.
• Treating a shareholder withdrawal as a dividend without a directors' resolution and T5 filing.

Related concepts

Eligible and non-eligible dividends are the core of owner-manager salary versus dividend planning and feed directly into the T1 return. Their tax cost depends on where the filer sits in the federal bracket schedule, and they compete with capital gains as a way to extract value from a CCPC.