Eligible vs Non-Eligible Dividends in Canada: The Simple Answer
Dividends are a key aspect of corporate taxation in Canada, impacting both corporations and shareholders. Understanding the difference between eligible and non-eligible dividends is essential for effective tax planning and compliance.
What Are Eligible Dividends?
Eligible dividends are paid from a corporation’s General Rate Income Pool (GRIP) — income that has been taxed at the general corporate tax rate (approximately 26.5% in Ontario for 2025).
Key Features of Eligible Dividends:
- Paid from GRIP income, which is taxed at the higher corporate rate
- Receive a 38% gross-up
- Shareholders benefit from the enhanced dividend tax credit, lowering personal tax
Since shareholders pay less tax on eligible dividends, these are generally preferred over non-eligible dividends.
What Are Non-Eligible Dividends?
Non-eligible dividends, also known as ordinary dividends, are paid from a corporation’s Low Rate Income Pool (LRIP) — income taxed at the small business tax rate (about 12.2% in Ontario for 2025).
Key Features of Non-Eligible Dividends:
- Paid from LRIP or income not taxed at the general corporate rate
- Receive a 15% gross-up
- Shareholders get the ordinary dividend tax credit, providing less personal tax relief
Because the underlying income is taxed at a lower rate, shareholders generally face a higher personal tax liability on non-eligible dividends.
Compliance and Reporting Requirements
Corporations must maintain accurate records of the income used to pay dividends. This is crucial for determining whether dividends are eligible or non-eligible.
Important obligations include:
- Properly classifying dividends in corporate records
- Clearly informing shareholders of the dividend type on statements
- Preparing a corporate resolution when declaring dividends
Failure to comply can lead to penalties for the corporation and adverse tax consequences for shareholders. Working with experienced tax professionals ensures dividends are properly classified and reported.
Which Dividend Should Shareholders Prefer?
- Eligible dividends: Generally better for shareholders due to lower personal tax
- Non-eligible dividends: Must be paid first if a corporation has only LRIP
Effective tax planning requires understanding the corporation’s income pools (GRIP vs. LRIP) and consulting qualified tax advisors.
Conclusion
In Canada, distinguishing between eligible and non-eligible dividends is essential for corporate and shareholder tax planning. Staying informed about GRIP and LRIP, tax credits, and compliance requirements can help both corporations and shareholders navigate dividend taxation effectively.For personalized guidance on dividend planning and corporate tax compliance in Ontario, contact Kalfa Law Firm today to speak with our experienced tax and corporate law professionals.
FAQs
Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
© Kalfa Law Firm , 2024
Updated December 2025
The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
