Eligible vs non-eligible dividends (CCPC guide)

Estimated reading time: 7 minutes

Eligible vs non-eligible dividends from a CCPC

If you own an incorporated business in Canada, you’ve probably heard that eligible dividends are “better” than non-eligible dividends. Sometimes they are. Sometimes they aren’t. And in many cases, your corporation can’t legally pay eligible dividends yet, even if you want to. This post explains eligible vs non-eligible (often called “ineligible”) dividends from a CCPC (Canadian-controlled private corporation) to a shareholder, in plain English, with the key CRA rules and practical steps.

What this post covers

We’ll cover:

• What eligible and non-eligible dividends are
• Why they’re taxed differently personally (gross-up + dividend tax credit)
• Whether a CCPC can “choose” which type to pay
• What GRIP is (and why it matters)
• The paperwork CRA expects (designation + T5)
• Common mistakes (including the 20% penalty tax)

First: “ineligible” usually means “non-eligible”

People often say “ineligible dividends.” CRA’s wording is usually “dividends other than eligible dividends.” In practice, business owners and accountants commonly call those non-eligible dividends. CRA recognizes the two categories on your personal return: eligible and other than eligible.

The difference in plain English

Eligible dividends

An eligible dividend is a taxable dividend paid to a Canadian resident that the corporation designates as eligible. CRA’s core concept is: eligible dividends generally come from corporate income that did not get the small business rate (for example, income taxed at the “general” corporate rate).

Non-eligible dividends

A non-eligible dividend is generally paid from corporate income that did benefit from the small business deduction (the lower corporate rate on qualifying active business income – often called “small business income”).

Why the CRA treats them differently

Gross-up and dividend tax credit basics

When you receive a taxable dividend personally, you don’t just report the cash you received. You report a “grossed-up” taxable amount, then you claim a dividend tax credit (DTC). The gross-up and DTC differ depending on whether the dividend is eligible or non-eligible. CRA summarizes the mechanics in its technical guidance.

• Eligible dividends: gross-up is 38% (taxable amount is 138% of cash).
• Non-eligible dividends: gross-up is 15% (taxable amount is 115% of cash).

At the federal level, CRA publishes the federal DTC calculation factors. For the 2024 personal tax year, CRA’s federal credit factors are 15.0198% of the taxable amount for eligible dividends and 9.0301% of the taxable amount for non-eligible dividends. (Canada)

Quick comparison table

(Why this matters: a higher gross-up increases taxable income – this can affect income-tested benefits and credits – even though the DTC helps offset tax.)

Can you “choose” eligible or non-eligible?

You can choose what you pay, but you can’t choose what you’re allowed to call it.

The real limiter: your corporation’s GRIP

A corporation’s ability to pay eligible dividends depends on a corporate tracking account called GRIP (General Rate Income Pool). CRA describes GRIP as a balance that generally reflects taxable income that has not benefited from the small business deduction or other special tax rate. Corporations use Schedule 53 to calculate and track it.

If your CCPC has little or no GRIP, it usually cannot designate dividends as eligible without triggering penalties (more on that below).

How a CCPC builds GRIP (and when it usually doesn’t)

Many small CCPCs earn mostly active business income under the small business limit. That income is taxed at the lower rate and generally supports non-eligible dividends, not eligible dividends.

GRIP tends to build when:

• Your corporation’s taxable income is above the small business limit (so part is taxed at a higher “general” rate), or
• Your CCPC’s access to the small business limit is reduced (for example, because the limit must be shared among associated corporations, or is reduced by taxable capital/passive income rules).

Step-by-step: how to pay the right dividend type

1) Confirm you’re allowed to pay an eligible dividend (if that’s the goal)

If you want to pay eligible dividends, you (or your accountant) should confirm:

• Your CCPC has sufficient GRIP to cover the eligible dividend designation
• The corporation is actually going to designate it properly (next step)

If you don’t have GRIP, you can still pay dividends – just non-eligible.

2) Declare the dividend properly (paperwork)

At minimum, keep:

• A director’s resolution (or minutes) declaring the dividend (amount, date, class of shares)
• Proof of payment (bank transfer, cheque, or credit to shareholder loan)
• A clear note of whether it is eligible or non-eligible

This isn’t just “nice to have.” If CRA reviews your file, they will look for corporate records that match the T5 and your personal return.

3) Designate eligible dividends in writing (required)

If the dividend is eligible, CRA requires that the corporation designate each eligible dividend before or at the time it’s paid and notify the shareholder in writing that it is eligible.

In practice, this is often done with:

• A dividend resolution that explicitly states: “This dividend is designated as an eligible dividend…”
• A simple written notice (letter/email) to the shareholder, kept in the corporate file

4) Issue the T5 correctly (and on time)

Dividends to Canadian-resident individuals are generally reported on a T5 slip.

Key CRA deadlines and rules:

• T5 filing deadline: last day of February following the calendar year paid
• Electronic filing requirement: as of January 2024, you must generally file electronically if you have more than 5 slips of the same type
• CRA explains how “other than eligible dividends” are reported from the T5 to your personal return.

Common mistakes we see (and what they cost)

Mislabeling dividends (Part III.1 tax exposure)

If a corporation designates dividends as eligible beyond its capacity (for example, without enough GRIP), CRA can assess Part III.1 tax.

• CRA states this penalty tax is 20% of the excessive eligible dividend designation.

This is one of the most expensive “simple mistakes” we see with DIY dividend planning.

Paying dividends without documentation

A T5 slip without a matching dividend resolution, or “random transfers” with no paperwork, can create:

• Shareholder disputes (different share classes, unequal payments)
• CRA audit issues (was it actually a dividend? was it a shareholder benefit? a loan repayment?)

Dividend type vs shareholder income level (surprise personal tax)

Eligible dividends often have a better credit at many income levels, but the higher gross-up also increases reported taxable income. That can affect:

• Income-tested credits/benefits
• Repayments/clawbacks (depending on the program)
• Your overall tax bracket picture

This is why “eligible is always better” is not always true.

Planning notes for owner-managers

When eligible dividends often make sense

Eligible dividends are commonly helpful when:

• Your corporation actually has GRIP
• You’re trying to distribute profits taxed at the higher corporate rate (integration concept)
• Your personal income level won’t be harmed by the higher gross-up

When non-eligible dividends may be better

Non-eligible dividends can be better when:

• Your corporation mainly earns income under the small business limit (common for many CCPCs)
• You’re trying to manage personal income levels (because the gross-up is smaller)

Dividends vs salary (quick reminder)

Refer to our in-depth blog post on Dividends vs Salary. Dividends aren’t subject to CPP the way salary is, but salary creates RRSP room and may be better for certain planning goals.

FAQ: eligible vs non-eligible dividends

1) What is an “ineligible dividend” in Canada?
Most people mean a non-eligible dividend (CRA: “dividends other than eligible dividends”).

2) How do I know if my CCPC can pay eligible dividends?
Your CCPC generally needs enough GRIP to support the eligible dividend designation, calculated/tracked on Schedule 53.

3) Do I have to tell the shareholder the dividend is eligible?
Yes. Dividend resolutions should be dated before or at the time of payment for eligible dividends.

4) What happens if I accidentally pay an eligible dividend without enough GRIP?
CRA can assess Part III.1 tax equal to 20% of the excessive designation (plus interest).

5) Where do dividends show up on the personal tax return?
Eligible dividends are reported on line 12000. “Other than eligible” dividends are reported on line 12010 (and also included in 12000).

6) When are T5 slips due for dividends?
The T5 information return is due by the last day of February following the calendar year paid.

Final takeaway

Eligible vs non-eligible dividends isn’t just a “tax preference.” It’s a CRA classification tied to how your CCPC was taxed and what it can support (especially through GRIP), plus the right designation paperwork and T5 reporting.

If you’re paying yourself dividends and you’re not 100% sure which type you’re allowed to pay … or you want to optimize across corporate + personal tax … our Tax Team at Think Accounting can review your year-end numbers, confirm GRIP/dividend capacity, and set up a clean, repeatable dividend process that stays CRA-compliant.