Canadian Dividend Tax Credit: Eligible vs Non-Eligible

Canada’s dividend tax credit (DTC) system is designed to reduce double taxation — once at the corporate level and again when dividends are paid to shareholders. The mechanism involves a gross-up followed by a tax credit, and the rates differ depending on whether the dividend is “eligible” or “non-eligible.”

The Gross-Up and Credit Mechanism

When a Canadian corporation pays you a dividend, the actual cash you receive is not the amount you report as income. Instead, the CRA requires you to “gross up” the dividend to approximate the corporation’s pre-tax earnings, then provides a tax credit to offset the corporate tax already paid.

The process works in three steps:

1. Receive the actual dividend amount
2. Gross up the dividend by a set percentage (to approximate pre-tax corporate income)
3. Claim the dividend tax credit against your federal and provincial tax

Eligible vs Non-Eligible Dividends

The distinction reflects the corporate tax rate paid on the underlying income:

Eligible Dividends

• Paid by public corporations and CCPCs on income taxed at the general corporate rate (approximately 26-31%)
• Gross-up: 38% (taxable amount = actual dividend x 1.38)
• Federal DTC: 15.0198% of the taxable (grossed-up) amount
• Effective federal credit rate: approximately 20.73% of actual dividend

Non-Eligible Dividends

• Paid by Canadian-Controlled Private Corporations (CCPCs) on income taxed at the small business rate (approximately 9-12.2%)
• Gross-up: 15% (taxable amount = actual dividend x 1.15)
• Federal DTC: 9.0301% of the taxable (grossed-up) amount
• Effective federal credit rate: approximately 10.38% of actual dividend

Provincial Dividend Tax Credits

Each province provides its own DTC on top of the federal credit. Provincial DTC rates vary significantly:

Province	Eligible DTC Rate	Non-Eligible DTC Rate
Ontario	10.0%	2.9863%
British Columbia	12.0%	1.96%
Alberta	8.12%	2.18%
Quebec	11.86%	3.42%

These rates are applied to the taxable (grossed-up) amount, not the actual dividend received.

Integration Theory

The DTC system is based on the principle of tax integration — the idea that a dollar of corporate income paid out as a dividend should bear roughly the same total tax burden as a dollar of income earned directly by an individual. In theory, it should not matter whether you earn income through a corporation or as personal income.

In practice, integration is imperfect. Depending on your province and marginal tax rate, dividends may be taxed slightly more or less favorably than employment income. Generally:

• High-income earners pay slightly more on eligible dividends than on equivalent salary
• Low-income earners may pay very little or even negative tax on eligible dividends (due to the DTC exceeding the tax on the grossed-up amount)
• Non-eligible dividends typically result in a slightly higher tax burden than salary at most income levels

Impact on Other Benefits

The gross-up increases your taxable income even though you did not receive that much cash. This can affect income-tested benefits:

• OAS clawback: Grossed-up dividends push income higher, potentially triggering OAS recovery tax
• Canada Child Benefit: Higher taxable income reduces CCB payments
• GST/HST credit: May be reduced based on net income including grossed-up dividends

This is an important planning consideration for retirees and families with children.

CCPC Dividend Planning

Owners of CCPCs have the flexibility to choose between paying themselves a salary or dividend (or a mix). The salary-versus-dividend decision depends on:

• Your personal marginal tax rate
• CPP implications (salary generates CPP room; dividends do not)
• RRSP room (salary generates RRSP room; dividends do not)
• The provincial integration gap in your province

Many accountants recommend a blended approach: enough salary to maximize CPP and RRSP, with the remainder as dividends.

Bottom Line

The Canadian dividend tax credit reduces double taxation on corporate dividends through a gross-up and credit system. Eligible dividends receive a larger credit reflecting higher corporate tax, while non-eligible dividends receive a smaller credit. Use our Dividend Tax Calculator to compare the after-tax impact of eligible and non-eligible dividends at your income level and province.