Eligible vs. Non-Eligible Dividends

In Canada, dividends from Canadian companies fall into two categories: eligible and non-eligible. The difference comes down to the type of corporation paying the dividend and the tax credit you receive.

Eligible dividends are typically paid by large, publicly traded Canadian corporations (the ones most investors encounter). These dividends come with a larger tax credit, meaning you pay less tax on them. Non-eligible dividends are usually paid by smaller Canadian-controlled private corporations (CCPCs) and receive a smaller tax credit.

Why it matters

The tax treatment of dividends in Canada is more generous than you might expect, but only if the dividends are Canadian. When you receive an eligible dividend, the amount gets “grossed up” by 38% on your tax return, and then you receive a federal dividend tax credit that offsets a good chunk of the tax. The math works out so that eligible dividends are taxed at a lower effective rate than regular employment income, especially at lower income levels.

Non-eligible dividends go through a similar process but with a smaller gross-up (15%) and a smaller credit. You still get a tax advantage compared to interest income, but it’s not as generous.

This distinction only applies to Canadian dividends held in non-registered accounts. Inside a TFSA or RRSP, it doesn’t matter because the income isn’t taxed in the account anyway. And U.S. or international dividends don’t qualify for the Canadian dividend tax credit at all.

Example

Say you receive $1,000 in eligible dividends from a Canadian bank stock in your non-registered account. On your tax return, that $1,000 gets grossed up by 38% to $1,380. You pay tax on $1,380, but then you receive a federal dividend tax credit that claws most of it back. In Ontario, someone in the $55,000 income bracket would pay roughly $120 in combined tax on that $1,000. The same $1,000 earned as interest income would cost about $300 in tax. That’s a meaningful difference.

We break down how dividends are taxed in more detail in our guide to Canadian dividends.