ELIGIBLE DIVIDENDS (Enhanced Dividend Gross-Up & Tax Credit)
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An eligible dividend is a taxable dividend that receives an enhanced dividend gross up and an enhanced dividend tax credit and is available on dividends from either a public corporation (not entitled to the small business deduction) or a private corporation with high earnings (net income over the $500,000 small business deduction). As those corporations pay corporate tax at higher rates than small businesses and passive income, the federal government entitles those corporations to pay their shareholders eligible dividends, provided those particular dividends meet established criteria for their designation and treatment as eligible dividends.
Those corporations have had a portion of their income that is taxed at the higher corporate tax rate flowed into a corporation's General Rate Income Pool (GRIP) balance, which accumulates over time. The corporation’s General Rate Income Pool (GRIP) represents the accumulated after-tax amount of income that has been subject to the higher corporate tax rate, which can be drawn down with the payment of eligible dividends. Eligible dividends are issued from a corporation up to the amount available in its General Rate Income Pool (GRIP).
Eligible dividends are "grossed-up" to reflect corporate income earned, and then an enhanced dividend tax credit is included to reflect the higher rate of corporate taxes paid.
An eligible dividend, as defined at subsection 89(1) of the Income Tax Act, is the portion of a taxable dividend that is paid by a corporation resident in Canada to a person resident in Canada and designated as an eligible dividend in the manner set out in subsection 89(14) of the Income Tax Act. An eligible dividend also includes certain amounts that might be deemed to be a taxable dividend received by a person resident in Canada. Specifically, this includes:
• an amount allocated by a SIFT partnership (a specified investment flow-through partnership, defined in subsections 197(1) and 248(1) of the Income Tax Act) that is deemed by subsection 96(1.11) of the Income Tax Act to be a taxable dividend; or
• a distribution from a SIFT trust (a specified investment flow-through trust, defined in subsections 122.1(1) and 248(1) of the Income Tax Act) that is deemed by subsection 104(16) of the Income Tax Act to be a taxable dividend.
All other dividends, including those that have not been properly designated, are considered to be non-eligible dividends.
The designation of an eligible dividend for Canadian-controlled private corporations (CCPCs) and other private corporations, as defined in subsection 89(1) of the Income Tax Act, must be made each time a dividend is paid by notifying the recipient shareholders in writing.
For public corporations, as defined in subsection 89(1) of the Income Tax Act, notification is considered to have been made if before or at the time the dividend is paid, the public corporation makes a designation using an acceptable method.
The designation must state that all dividends are eligible dividends unless indicated otherwise. In certain limited circumstances for taxable dividends paid after March 28, 2012, a corporation may be permitted to make a late designation of an eligible dividend.
Further specifics as to eligible dividends is set out in Revenue Canada’s Income Tax Folio S3-F2-C2.
For corporate tax matters and advanced tax planning, including optimizing legitimate tax planning strategies to get the most from your business, contact our law firm to schedule a confidential initial consultation at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
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