What Dividends Are Eligible and Non-Eligible?

A dividend is usually money that a business or investment corporation makes and gives to its shareholders.

Dividends from Canadian corporations are taxed at a lower rate than other forms of income, such as wages or interest. Because the firm has already paid taxes on the money it generated and used to pay dividends, the dividends are not taxed again when they are paid. As a result, there is a means to claim a credit for corporation taxes previously paid.

Individuals should pay the same amount of tax whether they earn money on their own or via a company, and the profits from that enterprise should be paid to them as a dividend. Without granting credit for corporate taxes paid, this additional tax would make it more difficult for citizens to buy shares in both public and private firms.

Individuals should pay a similar amount of tax whether they make income on their own or through an individual, and the profits from that business should be given to them as a dividend. Without giving credit for corporate taxes paid, this extra tax would make it more difficult for people to own shares in both public and private corporations.

If a Canadian corporation pays out a dividend, it can be an "eligible," "non-eligible," or "capital" dividend. The tax implications and rates for each type of dividend are meant to show both how the corporation taxes its own income as well as how much tax would be paid if the same income were earned by someone else.

Most of the time, a Canadian-owned private corporation (CCPC) pays fewer taxes on its first $500,000 of income and more taxes on its next $500,000 of income (20 percent in Ontario for 2017). It's possible to pay an eligible dividend to a company with income that's taxed at a higher rate. As a result, small business income that was taxed at a lower rate will not be paid out as a dividend.

Eligible Dividends

In the Income Tax Act, section 89(14), an eligible dividend is a taxable dividend that is paid by a Canadian resident corporation, received by a Canadian resident individual, and designated by the corporation as an eligible dividend under this section.

Public corporations, which don't get the small business deduction, or private corporations with a lot of money (net income over the $500,000 small business deduction) are the most likely to pay out eligible dividends. These kinds of businesses pay more corporate tax than small businesses do.

Some of a company's income is taxed at the higher corporate tax rate. This money goes into the company's general rate income pool (GRIP) balance, where it grows over time. As a general rule, GRIP is the amount of income that has been taxed at a higher rate because it was made by a business.

All eligible dividends are "grossed up" to show how much income the company made. Then, because the company paid a higher rate of corporate tax, they get a bigger credit for their dividends. People who get eligible dividends are taxed at a lower rate than those who get non-eligible dividends. When you pay taxes on your own money, eligible dividends are taxed more favourably than non-eligible dividends.

Ineligible Dividends

Most of the time, ineligible dividends come from Canadian private corporations that have paid the lower tax rate on the first $3,000 of income. Small company dividends are referred to as "regular," "normal," or simply "dividends."

A reduced dividend tax credit is obtained because the corporation has paid less corporate tax when dividends that are not ineligible are grossed up to represent pre-tax corporate income. However, the percentages used to show how much corporate tax is paid are different.

This is because the rate is lower. Because no income is taxed at the higher corporate rate and no GRIP pool is set up, eligible dividends can't be paid out.

If you are a Canadian resident and you get taxable dividends from a Canadian company, you can get a tax credit for that money. It doesn't apply to dividends you get from foreign corporations because the Canadian government doesn't think it is right for them to give you a credit for the foreign corporate tax they paid to the foreign corporation.

The dividend will be taxed in the country where you live. You will get a credit for the 15% withholding tax that you pay on your own. This is termed a "foreign tax credit."

Form of dividends

It is possible for a dividend to take on a form or shape. When a corporation distributes its shareholders' money in the form of a dividend, the directors of the corporation announce that the money will be handed to the shareholders. This could be in the form of cash, but it could also be a dividend in kind in the form of stock, property, or debts. A stock dividend is when a corporation gives its stock to its shareholders as a reward. To figure out how much a stock dividend is worth, the fair market value of the stock is added to the dividend.

A property dividend is a dividend that doesn't come in the form of cash. It includes stock dividends but is more commonly used to refer to distributions of things like equipment, inventory, or real estate, as well as things like art or jewelry.

For the individual, the value of the dividend is the same as its fair market value. For the corporation, the distribution of property will be a disposition and thus be taxed. In this way, the corporation will make or lose money on the property it sells based on the current fair market value of the property less the corporation's adjusted cost base for the property.

A loss may be good for the corporation if the corporation is very profitable. The loss can be used to cancel out the corporation's other gains or income.

They can also be paid in the form of notes payable, which is a promise by the corporation to pay back its dividends later on. This is called debt, and it's a form of money. This type of dividend can be used for a lot of different things in business planning and corporate reorganizations.

The note payable may or may not earn interest, depending on the specifics. Keep in mind, though, that the note payable is income to the individual who gets it, and that individual must report the value of the note on his Canadian income tax return for that year.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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