Eligible vs. Non-Eligible Dividends in Canada: What Business Owners Should Know
Eligible or non-eligible dividends? Ottawa CPA Majdi Ibrahim explains the gross-up, dividend tax credit, GRIP, and why eligible isn't always better.
By Majdi Ibrahim, CPA | Majdi Ibrahim, CPA Professional Corporation | Ottawa, Ontario
If you've ever looked at a T5 slip and noticed the words "eligible" or "non-eligible" next to your dividend amout and wondered what the difference actually means — you're not alone. It's one of those terms that shows up constantly in incorporated business owner conversations without much explanation of why it matters.
The short version: eligible and non-eligible dividends are taxed differently in your hands personally, and the corporation doesn't get to simply choose which type to pay based on preference. This article explains the mechanics, why the distinction exists, and what it means for your year-end planning.
We cover the broader salary vs. dividends question in our salary vs. dividends guide and the full range of ways to pay yourself in our how to pay yourself article. This article focuses specifically on the eligible/non-eligible distinction.
At a Glance
Both eligible and non-eligible dividends are taxed using a gross-up and tax credit system, designed to reflect the corporate tax already paid on the underlying income.
Eligible dividends generally come from income taxed at the general corporate rate — for most small businesses, this means income above the small business deduction limit, or income earned by a corporation that doesn't qualify for the small business rate.
Non-eligible dividends generally come from income taxed at the small business rate — for most owner-managed small businesses, this is the more common dividend type.
A corporation cannot simply choose to designate eligible dividends because it would benefit shareholders. The designation must be supported by a General Rate Income Pool (GRIP) balance, and excessive designations carry a real penalty.
"Eligible is always better" is not actually true. The higher gross-up on eligible dividends increases reported taxable income, which can affect income-tested benefits and credits even though the tax credit is also larger.
Why Dividends Are Taxed With a Gross-Up and Credit System
To understand eligible vs. non-eligible dividends, it helps to understand why dividends aren't simply taxed at face value in the first place.
When a corporation earns income, it pays corporate tax on that income before any dividend is paid out. When the after-tax amount is then distributed to you as a shareholder, taxing the dividend again at full personal rates would mean that income gets taxed twice — once at the corporate level, once at the personal level — with no recognition of the corporate tax already paid.
To avoid this, Canada uses a gross-up and dividend tax credit mechanism. You report a dividend amount higher than what you actually received (the "gross-up"), which approximates the pre-tax corporate income the dividend came from. You then claim a dividend tax credit that reduces your personal tax to account for the corporate tax already paid. This is the integration principle — the system is designed so that, in combination, corporate tax plus personal tax on the dividend lands roughly where personal tax on that income would have landed if you'd earned it directly.
The gross-up and credit are different for eligible and non-eligible dividends because the underlying corporate tax rate is different.
Non-Eligible Dividends: The Small Business Rate
Non-eligible dividends (sometimes called "other than eligible dividends") generally come from corporate income taxed at the small business rate — or from income that does not support an eligible dividend designation. In a typical owner-manager CCPC, this is the more common dividend type, simply because most of the corporation's income was taxed at the small business rate.
Because the corporation paid a lower rate of tax on this income, the personal-level gross-up and credit are calibrated lower:
- Gross-up: 15% (you report 115% of the cash dividend as taxable income)
- Federal dividend tax credit: 9.0301% of the taxable (grossed-up) amount
Eligible Dividends: The General Corporate Rate
Eligible dividends generally come from corporate income taxed at the general corporate rate — income that didn't benefit from the small business deduction. This includes:
- Active business income above the small business deduction limit
- Income earned by larger corporations that don't qualify for the small business rate at all
- In some cases, eligible dividends received from other taxable Canadian corporations may also affect GRIP, depending on the corporation and the source of the dividend
Because the corporation paid a higher rate of tax on this income, the personal-level gross-up and credit are calibrated higher:
- Gross-up: 38% (you report 138% of the cash dividend as taxable income)
- Federal dividend tax credit: 15.0198% of the taxable (grossed-up) amount
The larger credit generally results in a lower effective personal tax rate on eligible dividends compared to non-eligible dividends of the same cash amount — which is the intended result, since more corporate tax was already paid on that income. Actual personal tax depends on the taxpayer's province, income level, and the applicable provincial dividend tax credit as well as the federal credit.
The GRIP Requirement: Why You Can't Just Choose
This is the part that surprises people: a corporation cannot simply decide to call a dividend "eligible" because it would result in lower personal tax for the shareholder.
A corporation's ability to designate dividends as eligible depends on its General Rate Income Pool (GRIP) — a tracking account that generally reflects the corporation's accumulated income that was taxed at the general corporate rate (not the small business rate). CRA requires corporations to calculate and track GRIP using Schedule 53 of the T2 return.
If a corporation has earned only active business income within the small business limit, its GRIP balance is likely zero or very small — meaning it has little or no capacity to designate eligible dividends, regardless of how much cash is sitting in the corporate bank account. Cash availability and GRIP availability are two completely different things.
The penalty for excessive eligible dividend designations is real. If a corporation designates more eligible dividends than its GRIP supports, Part III.1 tax can apply — generally 20% of the excessive eligible dividend designation. In some cases, an election may be available to treat the excessive portion as an ordinary dividend, but this is not something to rely on as routine cleanup. Additional tax can apply where the designation is part of an avoidance arrangement. This is one of the more expensive mistakes that can arise from informal, DIY dividend planning without proper GRIP tracking.
"Eligible Is Always Better" Is Not Actually True
It's tempting to assume that because eligible dividends carry a lower effective personal tax rate, they're simply better whenever available. This isn't always the case, for a few reasons:
The higher gross-up increases reported taxable income. Even though the tax credit largely offsets the additional tax, the grossed-up amount still counts as income for other purposes — including income-tested benefits and credits, OAS clawback thresholds, and other calculations based on net or taxable income. A dividend that results in lower net tax but higher reported income can still create downstream effects depending on your overall situation.
GRIP availability isn't unlimited or permanent. Even where a corporation has GRIP capacity, using it up on one shareholder's dividend in one year reduces what's available later. For corporations with multiple shareholders or multi-year planning, the timing and allocation of eligible dividend designations is a genuine planning question, not just "use it because it's available."
For most small owner-managed corporations, the choice isn't really available. If the corporation's income is primarily active business income within the small business limit, there's often little or no GRIP to draw on — making the "eligible vs. non-eligible" question moot in practice for many small businesses, regardless of preference.
How This Connects to Salary vs. Dividends Planning
The eligible/non-eligible distinction adds a layer to the broader salary vs. dividends decision we cover elsewhere. A few practical connections:
Most small business owner-manager dividends are non-eligible. If your corporation's income is primarily taxed at the small business rate, the dividend side of your compensation will generally be non-eligible dividends — which is the relevant comparison point when weighing salary against dividends, not the more favourable eligible dividend rates you might read about elsewhere. If the small business limit is reduced because of associated corporations or passive investment income, some income may be taxed at the general rate and may build GRIP — which is one reason the passive income rules interact with dividend planning.
Growth into the general rate changes the picture. As a corporation's income grows beyond the small business limit, or as it becomes part of an associated group that shares the limit, more of its income may be taxed at the general rate — building GRIP and creating eligible dividend capacity over time.
Holding companies can affect GRIP flow. In an Opco/Holdco structure, eligible dividend planning can become more complex because intercorporate dividends, GRIP, RDTOH, Part IV tax, and year-end timing may all interact. Do not assume GRIP automatically flows through cleanly without reviewing the structure. We cover Opco/Holdco considerations in our holding company article.
T5 Reporting: Where This Shows Up
When a corporation pays a dividend, it issues a T5 slip (Statement of Investment Income) to the shareholder. The T5 separately reports the taxable amount and dividend tax credit for eligible and non-eligible dividends — they're tracked as distinct categories, not blended together.
Getting this right at the T5 stage matters: misreporting a non-eligible dividend as eligible (or vice versa) can lead to an incorrect dividend tax credit being claimed, which CRA can catch and reassess — along with potential penalties for the corporation if the eligible designation wasn't properly supported by GRIP.
Ottawa & Area: When This Question Actually Comes Up
For most early-stage and small incorporated businesses in Ottawa — consultants, contractors, small professional practices — the eligible vs. non-eligible question is largely academic in the early years, simply because most or all income is taxed at the small business rate and GRIP hasn't built up.
The conversation becomes more relevant for established Kanata or Barrhaven businesses that have grown beyond the small business limit, for corporations that are part of an associated group sharing the limit, or for businesses that have held significant investment income generating GRIP through other mechanisms. At that point, understanding which dividend type is actually being paid — and planning the GRIP balance deliberately — becomes a real part of year-end tax planning.
What Happens When You Bring This to Majdi Ibrahim, CPA?
Accurate GRIP tracking. We maintain your corporation's GRIP balance properly through Schedule 53, so eligible dividend designations are supported — not assumed.
The right dividend type, properly documented. When we recommend a dividend, we confirm whether it should be eligible or non-eligible based on the corporation's actual GRIP position, and ensure the T5 reflects it correctly.
Year-end planning that accounts for both dividend types. If your corporation has both small-business-rate and general-rate income, we factor the eligible/non-eligible mix into the broader salary vs. dividends and year-end planning conversation.
Avoiding the excessive designation penalty. We make sure dividend designations stay within what the corporation's GRIP actually supports — avoiding an expensive and avoidable Part III.1 tax exposure.
Book a consultation at www.treehousecpa.com
Frequently Asked Questions
What is the difference between eligible and non-eligible dividends?
Eligible dividends generally come from corporate income taxed at the general corporate rate, while non-eligible dividends generally come from income taxed at the small business rate or income that does not support an eligible dividend designation. Because the corporation paid different amounts of tax on the underlying income, the personal-level gross-up and dividend tax credit differ: eligible dividends have a 38% gross-up and a 15.0198% federal tax credit, while non-eligible dividends have a 15% gross-up and a 9.0301% federal tax credit. The result is generally a lower effective personal tax rate on eligible dividends, though actual results depend on province and income level.
Can my corporation just choose to pay eligible dividends instead of non-eligible?
No, not freely. A corporation's ability to designate dividends as eligible depends on its General Rate Income Pool (GRIP), a tracking account reflecting income taxed at the general corporate rate. If the corporation has little or no GRIP — common for small businesses earning primarily small-business-rate income — it has little or no capacity to designate eligible dividends regardless of cash available. If more is designated as eligible than the GRIP supports, Part III.1 tax can apply — generally 20% of the excessive amount.
Are eligible dividends always better for me personally?
Not necessarily. While eligible dividends generally have a lower effective personal tax rate, the higher 38% gross-up increases reported taxable income, which can affect income-tested benefits, credits, and other calculations. Actual results depend on province, income level, income-tested benefits or credits, and the shareholder's full personal tax picture. For most small owner-managed corporations, the choice is not really available in the first place, since GRIP capacity depends on having income taxed at the general corporate rate.
Why does my T5 slip show different amounts for eligible and non-eligible dividends?
T5 slips report eligible and non-eligible dividends as separate categories because each has a different gross-up percentage and a different dividend tax credit. The taxable amount you report on your personal return, and the credit you can claim, depend on correctly identifying which type of dividend was actually paid.
What happens if my corporation designates too much as an eligible dividend?
If a corporation designates more eligible dividends than its GRIP supports, Part III.1 tax can apply — generally 20% of the excessive eligible dividend designation. In some cases, an election may be available to treat the excessive portion as an ordinary dividend, but this is not something to rely on as routine cleanup. This typically arises when dividends are declared informally without proper GRIP tracking through Schedule 53.
Does a Holdco's GRIP work the same way as an Opco's?
Not always. In a multi-corporation structure, GRIP, intercorporate dividends, RDTOH, Part IV tax, and year-end timing can all interact. A Holdco/Opco structure should be reviewed before assuming eligible dividend capacity is available at the shareholder level.
Do most small business owners deal with eligible dividends at all?
Often not in the early years. If your corporation's income is primarily active business income within the small business limit, it's generally building little or no GRIP, meaning dividends paid are generally non-eligible. The eligible dividend question becomes more relevant as a corporation grows beyond the small business limit, becomes part of an associated group sharing the limit, or accumulates GRIP through other income sources.
This article is provided for general informational purposes only and does not constitute personalized tax, legal, or financial advice. Tax rules and rates are subject to change. Please consult a CPA for advice specific to your situation.
