Dividend income can be an effective way to generate passive income and enhance your long-term financial gains. Investing in Canadian dividend stocks with sustainable gains can provide special tax benefits. However, understanding the difference between eligible vs. non-eligible dividends is key to maximizing income.
In each section, we first define whether dividends are eligible vs. non-eligible.
Eligible dividends are shareholder profits paid by corporations from income taxed at a higher corporate rate. Private or public corporations with net income higher than the $500,000 small business deduction typically pay these dividends. Given this higher corporate tax rate, the individual receiving the dividend benefits from a more significant dividend tax credit.
Since 2018, companies “gross up” eligible dividends by 38% to include taxes that shareholders must pay on the dividend amount. If a company pays a $10 dividend per share, investors will get $13.80 per share in taxable income.
The federal dividend tax credit for eligible dividends is 15.0198% of the taxable dividends. The tax credit reduces the tax owed on the dividends received from Canadian corporations.
Eligible dividends include the following advantages:
- The dividend tax credit aims to decrease personal taxes on the payout. This credit is possible because corporations have already paid a high rate of taxes.
- Each province has its credit for dividends, further enhancing tax savings.
- Eligible dividend investments are attractive for non-registered accounts.
- The gross-up reduces net income for taxes. This helps lessen the effect on government benefits like Old Age Security (OAS) and Guaranteed Income Supplement (GIS).
There is a significant difference between eligible vs. ineligible dividends.
Private companies or Canadian Controlled Private Companies (CCPC) pay non-eligible dividends from income taxed at a lower rate. These dividends are also “grossed up” and receive a dividend tax credit but at a lower percentage. Shareholders get a minor dividend tax credit for non-eligible dividends.
Since 2019, the gross-up rate for non-eligible dividends is 15%. If a company pays a $10 dividend per share, investors get $11.50 per share as taxable income in a tax year.
The federal dividend tax credit for non-eligible dividends is 9.0301% of the taxable dividends. This credit applies to the investor's tax liability on the grossed-up portion of the dividend.
Non-eligible dividends include the following advantages:
- Even though they face higher taxes, these investments attract attention. This is especially true for those who have already maxed out their contributions to registered accounts such as RRSPs or TFSAs.
- They provide access to smaller private corporations. This access can expose investors to smaller, potentially high-growth businesses that may not be available through public markets.
- They add to a diverse investment portfolio, which is important in any long-term investment strategy.
Are all Canadian dividends eligible?
Canada has two distinct types of dividends: eligible and non-eligible. Canadian public corporations typically pay eligible dividends, and investors receive a higher dividend tax credit. Private companies and CCPCs pay non-eligible dividends and are subject to a much lower dividend tax credit.
Which Canadian stocks pay eligible dividends?
While Creditpicks does not provide investing advice, there are some Canadian stocks that perform consistently and pay dividends. These companies include the following:
- Canadian National Resources (CNQ.TO)
- Intact Financial (IFC.TO)
- Royal Bank (RY.TO)
- Canadian National Railways Co. (CNR.TO)
- National Bank (NA.TO)
It is extremely important that you research the securities intend to invest in. Further, using a top-tier investment platform is essential. If you are new to investing, consult a financial advisor or other professional.
Understanding the difference between eligible and non-eligible dividends helps investors make informed decisions about their investment strategies and tax planning. Investors can optimize their after-tax returns and minimize their tax liabilities by considering their tax treatment and advantages.
Creditpicks has extensive resources on various levels of investing. As we often say, “Readers are leaders.” Research pays off when investing, and finding a platform that provides this research is necessary. Be sure to do your due diligence; it is the difference in successful investing.