Taxes on Different Types of Dividends

The tax implications to an individual associated with a dividend received will depend on the type of the dividend.  

Assuming that the issuing corporation is resident in Canada, then the dividend will be taxed at a lower rate than other ordinary income, such as employment or interest income. The reason for this is that the income used to pay the dividend has already been taxed in the corporation. This is known as the concept of integration, the basic principle being to avoid double tax at the corporate and individual levels.  The theory behind integration is that an individual should pay the same amount of tax whether they earn income personally or earn it through a corporation and distribute the after-tax profits.  A dividend paid by a Canadian corporation can be classified as either an “eligible”, “non-eligible” or a “capital” dividend.  The tax implications and rates applied to each type of dividend is meant to reflect the underlying taxation of income within the corporation.  Generally, a Canadian controlled private corporation (CCPC) is eligible for a lower tax rate on its first $500,000 of income (currently 15.5% in Ontario) and is taxed at a higher rate thereafter (currently 26.5% in Ontario).  Corporate income that has been taxed at the higher rate can be paid as eligible dividend, whereas, income that has been taxed at the lower rate will be paid as an ineligible dividend.   

Eligible Dividends

Eligible dividends are generally received from either public company shares or private corporations with relevant eligible dividend tax pool balances, known as GRIP. Eligible dividends are taxed at a lower rate when received by individuals than non-eligible dividends, since in order to have GRIP and pay an eligible dividend, the corporation would have paid a higher level of corporate tax. Eligible dividends are subject to an enhanced dividend tax credit to reflect the higher rate of corporate tax that has been paid. 

Non-eligible Dividends

Non-eligible dividends are generally received from Canadian private corporations that have paid the lower tax rate on the first $500,000 of income.  Non-eligible dividends are taxed at higher rate when received by individuals since they are not eligible for the enhanced dividend tax credit since the corporation has paid less corporate tax.

The actual dividend tax rates by province can be accessed on: http://www.taxtips.ca/marginaltaxrates.htm

For Ontario the top marginal tax rate on non eligible dividends is 40.13% and for eligible dividends it is 33.82%.

Capital Dividends

When a corporation realizes a capital gain, half of the gain taxable and the other half is not taxable and is added to what is known as the capital dividend account (CDA).  Tracking the CDA is important since Capital Dividends can be paid out of a corporation and received by an individual tax-free. They play an important part of any estate planning exercise since they can help reduce the tax liability arising from the deemed disposition of shares on death.

For information on capital dividends, please see Capital Dividend Account.