What’s the difference between eligible and non-eligible dividends? What are the implications to you?
Dividends are payments made to shareholders to allocate the earnings of a corporation. There are two types of taxable dividends that a corporation can issue, non-eligible and eligible.
Non-eligible dividends are sometimes called ordinary, or small business dividends. These are dividends paid by corporations out of earnings that were taxed at low small business rates where taxable income was under $500,000. Businesses with taxable income under $500,000 qualify for the small business tax rate in 2018 of 12%. (10% federal plus 2% Alberta).
As the corporation was able to take advantage of a lower tax bracket, non-eligible dividends are taxed at higher rates personally when received. The rates fluctuate based on whatever personal tax bracket you are in. These dividends are taxed at approximately 10% more than an eligible dividend.
Eligible dividends are paid by corporations out of earnings that were taxed at the higher corporate tax rate where taxable income was greater than the small business deduction limit of $500,000. Eligible dividends can only be paid from a Canadian corporation if they are designated as such by the corporation.
These dividends can only be paid out of the company’s General Rate Income Pool account (GRIP). The GRIP account is based on a complex calculation but includes:
- A percentage applied to the company’s taxable income in excess of $500,000
- Eligible dividends received by the corporation
- Dividends received via an investment portfolio are likely eligible and added to the GRIP
As the company paid a higher tax rate, eligible dividends are taxed at lower rates personally. Eligible dividends cannot exceed the balance in the GRIP account.
For tax rate information, you can visit: http://www.taxtips.ca/taxrates/ab.htm
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Darren Buma of KWB Chartered Professional Accountants for providing this content.