--- title: "Understanding Canadian Tax Integration: Eligible and Non-Eligible Dividends" description: Learn about Canadian tax integration and how eligible and non-eligible dividends impact your taxes, including the mechanics of gross-ups and dividend tax credits. image: https://toroaccounting.ca/hubfs/image-png-Dec-24-2024-07-33-39-2704-PM.png --- [Skip to content](https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends#main-content) - [English](https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) - [Spanish](https://toroaccounting.ca/es/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) English Show submenu for translations [![Toro Financial Inc. dba Toro Accounting](https://toroaccounting.ca/hs-fs/hubfs/Logo-Square%20(500%20x%20200%20px)-1.png?width=450&height=150&name=Logo-Square%20(500%20x%20200%20px)-1.png)](https://toroaccounting.ca/en?hsLang=en) - [Home](https://toroaccounting.ca/en/) - [Taxes](https://toroaccounting.ca/en/tax-filing-services) Show submenu for Taxes - [1st Tax Filing](https://toroaccounting.ca/en/steps-for-filing-t1) - [Bookkeeping](https://toroaccounting.ca/en/bookkeeping) - [Business Plans](https://toroaccounting.ca/en/create-my-business-plan) - [Blog](https://toroaccounting.ca/blog) Open main navigation Close main navigation - [Home](https://toroaccounting.ca/en/) - [Taxes](https://toroaccounting.ca/en/tax-filing-services) Show submenu for Taxes - [1st Tax Filing](https://toroaccounting.ca/en/steps-for-filing-t1) - [Bookkeeping](https://toroaccounting.ca/en/bookkeeping) - [Business Plans](https://toroaccounting.ca/en/create-my-business-plan) - [Blog](https://toroaccounting.ca/blog) - - [English](https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) - [Spanish](https://toroaccounting.ca/es/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) English Show submenu for translations - [Book a Free Consultation](https://toroaccounting.ca/en/book-consultation) [Book a Free Consultation](https://toroaccounting.ca/en/book-consultation?hsLang=en) Dec 24, 2024, 2:35:00 PM # Understanding Canadian Tax Integration: Eligible and Non-Eligible Dividends [Camilo Toro](https://toroaccounting.ca/blog/author/camilo-toro) Share: [facebook-f icon](http://www.facebook.com/share.php?u=https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) [linkedin-in icon](http://www.linkedin.com/shareArticle?mini=true&url=https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) [Twitter icon](https://twitter.com/intent/tweet?url=https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) [pinterest-p icon](http://pinterest.com/pin/create/link/?url=https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) [envelope icon](mailto:?body=https://toroaccounting.ca/blog/understanding-canadian-tax-integration-eligible-and-non-eligible-dividends) Tax integration is a fundamental principle of the Canadian tax system. It aims to ensure that income earned by a corporation and subsequently distributed to its shareholders is taxed at roughly the same rate as if the income had been earned directly by the individual. This is accomplished through the use of dividend gross-ups and tax credits. In this post, we’ll explore the two main types of dividends—eligible and non-eligible—and how tax integration minimizes the double taxation of corporate earnings. ![](https://toroaccounting.ca/hs-fs/hubfs/image-png-Dec-24-2024-07-33-39-2704-PM.png?width=921&height=617&name=image-png-Dec-24-2024-07-33-39-2704-PM.png) #### What Are Dividends? Dividends are distributions of a corporation’s after-tax profits to its shareholders. For Canadian residents, these payments are considered taxable income. However, to avoid taxing the same income twice—once at the corporate level and again at the personal level—Canada uses a system of gross-ups and dividend tax credits. #### Types of Dividends in Canada 1. **Eligible Dividends:** Eligible dividends are paid by corporations from income taxed at the general corporate tax rate. These dividends are often distributed by public corporations or private corporations with significant business income. Because these corporations have already paid a higher rate of tax, the eligible dividend system provides a larger tax credit to shareholders. 2. **Non-Eligible Dividends:** Non-eligible dividends are paid from income that was taxed at the lower small business corporate tax rate. These dividends are common among Canadian-controlled private corporations (CCPCs) that benefit from the small business deduction (SBD). Since less tax is paid at the corporate level, shareholders receive a smaller tax credit. #### The Mechanics of Tax Integration The tax integration process involves two key components: 1. **Gross-Up:** When reporting dividend income, taxpayers must first “gross-up” the dividend to account for the corporate income before the corporate income tax rate. This increases the taxable income on which personal taxes are calculated. - For eligible dividends, the gross-up rate is **38%**. This is because eligible dividends are earned after paying the high federal corporate tax rates that don't benefit from the small business deduction. - For non-eligible dividends, the gross-up rate is **15%**. This is because non-eligible dividends are earned after paying the small business corporate income tax rates earned by CCPCs generally on the 1st $500,000 of active (not passive) small business income. 2. **Dividend Tax Credit (DTC):** After the gross-up, taxpayers are entitled to a non-refundable tax credit to reflect the corporate taxes already paid to ensure that taxes are not paid twice. - For eligible dividends, the federal DTC is **15.0198% of the grossed-up amount**. - For non-eligible dividends, the federal DTC is **9.031% of the grossed-up amount**. Each province also provides its own dividend tax credit, which varies across jurisdictions. #### Example: Comparing Eligible and Non-Eligible Dividends Let’s assume an individual receives $1,000 in dividends: **Eligible Dividends:** 1. Gross-up: $1,000 × 38% = $1,380 (taxable income) 2. Federal DTC: $1,380 × 15.0198% = $207.27 3. Additional provincial DTC applies, reducing taxes further. **Non-Eligible Dividends:** 1. Gross-up: $1,000 × 15% = $1,150 (taxable income) 2. Federal DTC: $1,150 × 9.031% = $103.86 3. Additional provincial DTC applies, reducing taxes further. In this scenario, eligible dividends benefit from a higher tax credit, resulting in lower personal taxes. #### Why Does This Matter? Understanding the distinction between eligible and non-eligible dividends is crucial for: - **Tax Planning:** Business owners can optimize how they distribute income to minimize overall taxes. - **Investing:** Investors can estimate the after-tax return on dividend-paying stocks. - **Compliance:** Accurate reporting ensures that individuals claim the appropriate tax credits. #### Key Takeaways - Tax integration seeks to eliminate the double taxation of corporate income. - Eligible dividends, taxed at higher corporate rates, offer larger tax credits to shareholders. - Non-eligible dividends, taxed at lower corporate rates, provide smaller tax credits. - Understanding the mechanics of gross-ups and dividend tax credits can help individuals and businesses plan effectively. Whether you’re a business owner deciding how to distribute corporate income or an investor looking to maximize after-tax returns, a solid grasp of Canadian tax integration principles is invaluable. For personalized advice, consult a professional accountant or tax advisor familiar with your specific circumstances. [Tax](https://toroaccounting.ca/blog/tag/tax), [Corporation](https://toroaccounting.ca/blog/tag/corporation), [Dividends](https://toroaccounting.ca/blog/tag/dividends) ## Related posts [![](https://toroaccounting.ca/hs-fs/hubfs/Medical%20Expenses.png?height=200&name=Medical%20Expenses.png)](https://toroaccounting.ca/blog/medical-expense-tax-credits?hsLang=en) [Tax](https://toroaccounting.ca/blog/tag/tax), [CRA](https://toroaccounting.ca/blog/tag/cra) ## [Understanding Medical Expense Tax Credits in Canada](https://toroaccounting.ca/blog/medical-expense-tax-credits?hsLang=en) [Camilo Toro](https://toroaccounting.ca/blog/author/camilo-toro) Feb 16, 2025, 1:50:38 PM When it comes to managing healthcare costs, the Medical Expense Tax Credit (METC) can help... 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