Eligible dividends vs non-eligible dividends
Dividends from corporations usually show up on a T5 slip to be included in your personal taxes. T5 slips for dividends show the actual amount of dividends taken or declared, as well as a "grossed-up" amount and a dividend tax credit. The percentages used for the "gross-up" and the dividend tax credit are different for eligible and non-eligible dividends. This is what causes eligible dividends to be taxed more favourably on your personal taxes compared to non-eligible dividends.
Eligible dividends
Eligible dividends are generally received from public corporations (who do not receive the small business deduction) or private corporations with high earnings (net income over the $500,000 small business deduction). Those types of corporations pay corporate tax at higher rates than small businesses. A portion of income that is taxed at the higher corporate tax rate flows into a corporation's general rate income pool (GRIP) balance and accumulates. GRIP represents the after-tax amount of income that has been subject to the higher corporate tax rate.
Eligible dividends are issued from a corporation up to the amount sitting in the GRIP pool. Eligible dividends are "grossed-up" to reflect corporate income earned, and then a dividend tax credit is included to reflect the higher rate of corporate taxes paid.
Non-eligible dividends
Non-eligible dividends are received from small business corporations that earn under $500,000 of net income (most companies). These dividends are also "grossed-up," and they also receive a dividend tax credit. However, the percentages used are different to reflect corporate tax paid at a lesser rate. Therefore no income is taxed at the higher corporate rate and no GRIP pool is created, meaning eligible dividends are not able to be issued.
Summary
Eligible dividends are taxed more favourably than non-eligible dividends because the corporation has paid tax at higher rates and the individual receiving the dividend pays less.
Dividends are taxed at lesser rates than employment income and many other types of income in your hands personally. The dividend tax credit reflects that some taxes have already been paid at the corporate level.
Eligible dividends indicate that the corporation has paid tax at higher rates and therefore the individual receiving the dividend pays less.
Learn more about types of dividends.
FAQs
Eligible dividends are taxed more favourably than non-eligible dividends because the corporation has paid tax at higher rates and the individual receiving the dividend pays less. Dividends are taxed at lesser rates than employment income and many other types of income in your hands personally.
What is the difference between eligible and non eligible dividends? ›
Eligible dividends come with an enhanced dividend tax credit, which is why they are taxed more favourably than non-eligible dividends. Non-eligible dividends — taxed less favourably. These are paid out by Canadian private corporations (small businesses) that pay corporate tax at a lesser rate.
What is the difference between qual and non qual dividends? ›
Taxes on qualified dividends are more favorable and mimic long-term capital gains tax rates, which are currently at 0%, 15%, and a maximum of 20%. Whereas, non-qualified or 'ordinary' dividends are taxed at the less favorable ordinary income tax rates, which can reach a staggering 37%.
What is the difference between qualified and non-qualified dividends investopedia? ›
Ordinary, or non-qualified, dividends are paid by corporations to shareholders of record. Dividends are considered ordinary by default unless they meet special requirements put in place by the IRS. Ordinary dividends are taxed as ordinary income, while qualified dividends are taxed at the lower capital gains rate.
What is the difference between actual amount of dividends and taxable dividends? ›
While taxable dividends provide a straightforward income stream-, it's essential to understand the tax implications associated with taxable dividends. Taxable dividends are the grossed-up amount of actual dividends that are subject to taxation.
Who are all eligible for dividend? ›
You will be eligible to receive the dividend for stocks you bought before the ex-date. Note that you won't get dividend if you buy the stock on the ex-date, but you will be eligible if you sell them on the ex-date. Dividend will be credited to your primary bank account if you sell the stocks on the ex-date.
What are non-dividend distributions? ›
While most dividend distributions are taxable (some at lower rates than others), sometimes a portion of a distribution to shareholders is a nontaxable return of capital. These are also called nondividend distributions.
What is the difference between qualified and non-qualified? ›
Qualified plans qualify for certain tax benefits and government protection. Nonqualified plans do not meet all ERISA stipulations. Nonqualified plans are generally offered to executives and other key personnel whose needs cannot be met by an ERISA-qualified plan.
How do I know if my dividends are qualified or not? ›
How Do Investors Know If the Dividends I've Received Are Qualified or Not? The online trading platform or broker that an investor employs will break down the qualified and ordinary dividends paid in separate boxes on the IRS Form 1099-DIV.
What is the difference between qualified and nonqualified dividends on Turbotax? ›
Qualified versus nonqualified (ordinary) dividends
Qualified dividends are a special type of dividend that often receive preferential tax treatment. They're taxed as long-term capital gains (the rates are 0%, 15%, and 20%).
For the non-eligible dividend, the dividend gross-up (percentage of the dividend amount) is 15% and the federal dividend tax credit (fraction of the gross-up amount) is 9/13.
How much dividend income is tax free? ›
For single filers, if your 2023 taxable income was $44,625 or less, or $89,250 or less for married couples filing jointly, then you won't owe any income tax on dividends earned.
How much of qualified dividends are tax free? ›
Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.
How do you avoid tax on qualified dividends? ›
Strategies such as contributions to retirement accounts and health savings accounts (HSAs) may reduce your income below the zero-capital gains tax threshold. As a result, you wouldn't owe any taxes on qualified dividends.
Are reinvested dividends taxable? ›
When you reinvest dividends, for tax purposes you are essentially receiving the dividend and then using it to purchase more shares. So even though the dividend doesn't pass through your hands in cash form, it's still considered taxable income.
