Eligible vs non-eligible dividends: what the two types mean for an owner-manager

Two flavours of the same thing

A dividend is simply a distribution of a corporation’s after-tax profits to its shareholders. What trips up a lot of owner-managers is that Canada has two parallel dividend systems running at once, and every dividend your corporation pays has to be designated as one or the other: an eligible dividend or an other-than-eligible (commonly called non-eligible) dividend. The designation isn’t a matter of preference — it depends on what kind of corporate income the dividend is being paid out of.

Both types use the same two-step mechanism on your personal return: the actual cash you receive is “grossed up” to a larger taxable figure, and then a “dividend tax credit” is applied to offset the personal tax on that grossed-up amount. The two types just use different numbers.

The gross-up and credit, side by side

Here are the current federal figures. The gross-up inflates your cash dividend to its taxable amount; the credit is then calculated as a percentage of that grossed-up amount.

On top of the federal credit, every province applies its own provincial dividend tax credit to the same grossed-up amount, at its own rate, which is why the final tax on a dividend varies by where you live. In British Columbia, for example, the non-eligible provincial credit is 1.96% of the grossed-up amount.

The larger gross-up and credit on eligible dividends aren’t a bonus — they reflect the fact that eligible dividends are paid out of income that was taxed at the higher general corporate rate, so more corporate tax has already been paid. Non-eligible dividends come out of income taxed at the lower small-business rate, so less corporate tax was paid and a smaller personal credit is warranted.

Where “eligible” dividends actually come from: the GRIP

A Canadian-controlled private corporation can only pay an eligible dividend to the extent it has a balance in its General Rate Income Pool (GRIP). In plain terms, the GRIP tracks income the corporation earned that was taxed at the general corporate rate rather than the small-business rate — for instance, active business income above the $500,000 small-business limit, or certain income that didn’t qualify for the small-business deduction. If your corporation has only ever earned income under the small-business limit, it likely has little or no GRIP, and its dividends will be non-eligible.

This is why most owner-managers of small corporations pay themselves non-eligible dividends: their corporate income was taxed at the small-business rate, so that’s the pool the dividends come from. It’s not a mistake — it’s the system working as designed.

Why the two-system design exists: integration

The gross-up-and-credit machinery looks needlessly complicated until you understand what it’s trying to achieve: integration. The goal is that a dollar of business income should bear roughly the same total tax whether it’s earned by you directly, paid to you as salary, or flowed through your corporation and paid out as a dividend. The gross-up notionally reverses the corporate tax already paid, and the dividend tax credit returns the personal-level equivalent of that corporate tax, so you’re not taxed twice on the same dollar.

Integration is never perfect — small “integration costs” or savings exist at different income levels and in different provinces, but it’s close enough that the salary-versus-dividend decision usually turns on other factors like RRSP room, CPP, and cash flow rather than on a large tax difference. We walk through that trade-off in our guide to paying yourself salary vs dividends.

What this means in practice

For most incorporated owners, the practical takeaways are short: your corporation will usually pay you non-eligible dividends; those come with the smaller gross-up and credit; and the corporation has to formally designate the dividend type and, for eligible dividends, notify shareholders. Every dividend also has to be reported to CRA on a T5 slip, and paid in proportion to share ownership unless you’ve set up separate share classes.

Getting the mechanics right — the designation, the GRIP tracking, the T5 — is exactly the kind of thing that’s invisible until CRA asks about it. There is also a third kind of dividend that is neither eligible nor non-eligible: a capital dividend, paid tax-free out of the capital dividend account.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique, so please speak with a CPA before acting on anything here.

Which pool a dividend comes from matters most at year end, when a bonus is the alternative. See how the bonus and dividend comparison actually works. If family members are on the payroll, salary paid to a spouse has its own reasonableness test.

If the shareholder receiving the dividend is not resident in Canada, the eligible or non-eligible question is joined by a withholding obligation. See NR4 slips and Part XIII tax.

Which type of dividend to pay depends on the corporation’s pools and the owner’s other income that year; dividend planning works it out before the cheque is written.