NON-ELIGIBLE DIVIDENDS (ORDINARY DIVIDENDS)
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A non-eligible dividend (also known as an ordinary dividend) is a taxable dividend that does not receive the benefit of the enhanced dividend gross-up and the enhanced dividend tax credit that is provided to eligible dividends.
With respect to non-eligible dividends from certain small businesses and passive income, this is predicated on those dividends emanating from corporate income that was taxed at a preferential corporate tax rate, be it the small business corporate tax rate or the passive income tax rate.
Meanwhile, a public company or a private corporation with high earnings that has expended the entirety of its General Rate Income Pool (GRIP), would be required to pay any further dividends as non-eligible dividends.
Also, a failure to meet the Canadian eligibility requirements might subject the recipient shareholder to the lesser dividend tax credit that arises with the receipt of a non-eligible dividend, even where the dividend emanates from a public company or a private corporation with high earnings.
For comparative purposes, as to the difference between an eligible dividend’s enhanced dividend gross up and enhanced dividend tax credit and a non-eligible dividend’s standard dividend gross up and dividend tax credit, from a federal tax perspective (recognizing that provincial / territorial dividend tax credits are also available):
• For eligible dividends, the dividend gross-up is 38% and the federal dividend tax credit is 6/11.
• For non-eligible dividends, the dividend gross-up is 15% and the federal dividend tax credit is 9/13.
Further specifics as to non-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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