What is the difference between eligible and non-eligible dividends from my Ontario corporation?

Not all dividends from a Canadian private corporation are taxed the same way. The distinction between eligible and non-eligible (also called ordinary) dividends determines how much of a dividend tax credit you receive on your personal return.

Eligible dividends are paid from corporate income taxed at the higher general corporate rate — income that did not benefit from the small business deduction. They carry a higher gross-up and a more generous dividend tax credit, reflecting that more corporate tax was paid before distribution.

Non-eligible dividends are paid from income taxed at the lower small business rate or from certain other sources. They carry a smaller gross-up and a smaller dividend tax credit. Most private corporation dividends are non-eligible because the corporation is a CCPC using the small business deduction.

The corporation designates dividends as eligible or non-eligible at the time of payment and maintains notional accounts — the general rate income pool and the low rate income pool — to track how much it can pay in each category. Misdesignating a dividend can result in penalty taxes. If your corporation earns income at both rates, your accountant tracks which pool is available for which type of dividend payment.