Simplifying Dividend Taxation: Understanding Eligible and Non-Eligible Dividends in Canada

There are two commonly confused types of dividends: eligible and non-eligible.

Eligible dividends are paid out by public companies (think Nike, Coca-Cola, Shopify) from income that has already been taxed at a higher corporate tax rate.

Non-eligible dividends are paid out by private companies (think small local business, making under 500K profit) from income that has been taxed at a lower corporate tax rate.

When you (an individual) receive a dividend, you have to report it on your personal tax return at a higher amount than what you actually received. This is called a "gross-up." But don't worry, you get a "dividend tax credit" to reduce the tax you owe. Eligible dividends get a higher tax credit to make up for the higher corporate tax rate they already paid.

The idea is to make sure you pay a similar amount of tax whether you received the income directly or through a dividend. It's called "integration."

Integration is a concept in Canadian tax law that aims to create a level playing field between different forms of income. The goal is to ensure that individuals and businesses pay a similar amount of tax regardless of whether they receive income in the form of a dividend or directly as salary or wages.

This is achieved by using a combination of gross-up and dividend tax credit calculations, which work together to adjust the amount of taxable income and reduce the amount of tax owed. The result is that the effective tax rate on dividend income is generally similar to the tax rate on other types of income.

The integration system in Canada has undergone many changes over the years, with the goal of making it fairer and more effective. However, it can still be a complex and confusing topic for many small business owners and individuals.

If this is relevant for you, I encourage you to book a call with me if you'd like to better understand the basic concepts of gross-up, dividend tax credit, and integration, so you can better navigate the taxation of dividends in Canada and ensure that you are paying the right amount of tax on your income.

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