If you've ever looked at a T5 slip and seen "eligible dividends" and "dividends other than eligible" listed separately, you've bumped into one of the more confusing splits in Canadian tax law. Both are dividends. Both come out of corporate profit. But eligible vs. non-eligible dividends are taxed differently in an Ontario shareholder's hands, and the difference traces directly back to how much tax the paying corporation already paid on that profit.
This matters whether you're a shareholder trying to understand your own tax bill, or a business owner deciding how distributions from your corporation should be classified. Here's what actually separates the two categories, and why it matters beyond the paperwork.
The Two Types at a Glance
| Eligible Dividends | Non-Eligible Dividends | |
|---|---|---|
| Source of income | Generally profit taxed at the corporation's general (higher) rate | Generally profit that benefited from the small business deduction, taxed at a lower corporate rate |
| Gross-up applied | Larger | Smaller |
| Dividend tax credit | Larger | Smaller |
| Typically paid by | Public corporations, or private corporations distributing income that didn't qualify for the small business deduction | Most private (CCPC) small businesses distributing active business income taxed at the reduced small business rate |
| How it's set | Must be formally designated as "eligible" by the corporation when paid | Default classification when no eligible designation is made |
Why the Split Exists
Canada's dividend rules are built around the idea that a dollar of corporate profit shouldn't end up taxed twice at a combined rate wildly different from what an individual earning the same dollar directly would pay. Because small business income is taxed at a reduced federal and Ontario corporate rate, while general corporate income is taxed at a higher rate, the personal-side gross-up and credit are calibrated differently for each — so the total corporate-plus-personal tax lands in a comparable range either way.
In plain terms: less corporate tax already paid means the shareholder needs, and receives, a smaller personal credit; more corporate tax already paid means a bigger one.
How to Tell Which Type You Received
- Check your T5 slip. It reports "eligible dividends" and "dividends other than eligible dividends" in separate boxes.
- Ask about the source. Income taxed at the small business rate and distributed without a formal eligible designation is non-eligible by default.
- Look for a formal designation. A corporation must actively designate a dividend as eligible — often through a board resolution or a notice to shareholders — it doesn't happen automatically simply because the corporation had a strong year.
- When in doubt, ask the corporation's accountant. Designating dividends incorrectly can create tax problems for both the corporation and the shareholder.
Why This Matters Beyond the Numbers
- For shareholders: the type of dividend affects how much personal tax you owe on the same dollar amount received — a non-eligible dividend generally carries a somewhat higher personal tax cost than an eligible dividend of the same size, though your bracket and province still drive the final number.
- For business owners: most small, active Ontario businesses distributing income taxed at the small business rate will be paying non-eligible dividends by default, and that's entirely normal.
- For corporations with mixed income: a corporation earning both small-business-rate income and income taxed at the general rate may be able to pay both types of dividends, tracked through a specific account the corporation must maintain and monitor with its accountant.
Frequently asked questions
Can a small Ontario corporation ever pay eligible dividends?
Yes, if it has income taxed at the general corporate rate rather than the small business rate — for example, income above the small business limit, or income that doesn't qualify for the small business deduction at all. Most very small CCPCs paying dividends purely from small-business-rate income pay non-eligible dividends instead.
Does it cost the corporation more to pay eligible dividends?
The type of dividend doesn't change the cash the corporation pays out — it reflects which pool of already-taxed profit funded the dividend. What differs is the personal-side gross-up and credit the shareholder applies when reporting it.
What happens if a corporation designates a dividend as eligible when it shouldn't have?
Over-designating eligible dividends can trigger penalties and extra tax for the corporation. This is a technical area where the corporation's accountant should confirm the correct designation before dividends are paid, not after the fact.
As a shareholder, do I get to choose which type of dividend I receive?
Generally no — the corporation decides how to designate dividends when it pays them, based on its available pools of already-taxed income. As a shareholder, you simply report whatever type appears on your T5.
This is a tax question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.