Eligible and ineligible dividends are two types of dividends investors receive from taxable Canadian corporations. The main difference between eligible and ineligible dividends is how they are treated on the Canadian federal income tax return.
Designation of Eligible Dividend
Any dividend received by a Canadian resident from a Canadian corporation is an eligible dividend. Dividends received by non-residents are deemed ineligible, but they still benefit from a dividend tax credit, albeit lower than that for eligible dividends. Dividends from foreign corporations are reported separately and taxed as investment income.
Taxable Dividend Gross-up
As of January, 2013, eligible dividends are grossed up, or increased, by 138 percent and ineligible dividends are grossed up by 125 percent to determine their taxable amounts. In other words, multipy the dividend by either 1.38 or 1.25 and report the result on your tax return.
Federal Dividend Tax Credit
The federal dividend tax credit reduces the federal tax that is due. In 2012 the federal dividend tax credit was 15.1098 percent of the taxable amount of eligible dividends and 13.3333 percent of the taxable amount of ineligible dividends.
Net Effect of Gross-up and Federal Tax
Suppose you were in the top federal tax bracket of 29 percent in 2012 and you received $10,000 each in eligible and ineligible dividends. The gross-up for eligible dividends is 138 percent, resulting in a taxable amount of $13,800 and a federal tax of $4,002. Ineligible dividends are grossed up by 125 percent, resulting in a taxable amount of $12,500 and a federal tax of $3,625.
Effect of Federal Dividend Tax Credit
Applying the tax credit of 15.1098 percent to the $13,800 taxable eligible dividend results in a $2,085 tax reduction, or a net tax of $1,917. The tax credit for ineligible dividends would be 13.3333 percent of $12,500, or a $1,667 tax reduction, for a net tax on ineligible dividends of $1,958. You paid $250 less federal tax on your eligible dividends.
- Canada Revenue Agency (CRA): Line 120 - Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations (2009)
- Canada Revenue Agency (CRA): Designation of Eligible Dividends (2009)
- Canada Revenue Agency (CRA): Federal Dividend Tax Credit (2009)
- Canada Revenue Agency (CRA): Schedule 4, Statement of Investment Income