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How Do I Declare An Eligible Dividend?​

July 6, 2012

Tax Question:

How do I declare an eligible dividend and what is it?


To declare an eligible dividend, the corporation must have earned taxable profits in excess of $500,000 in prior years. These profits can be added to a pool of income that is available to distribute to the shareholders as special dividends, termed eligible dividends. These eligible dividends have a more favourable personal tax position than normal dividends.


The Canadian income tax system is based on a concept of integration. This concept tries to ensure that there is no difference in the total tax bill between income earned directly by an individual or earned first by a corporation and then paid to the same individual as a dividend. There are two corporate tax rates in Canada. The low rate of tax is available to BC Canadian Controlled Private Corporations (CCPC) that generate annual profits under $500,000. In BC these profits are taxed at 13.5%. If a CCPC in BC generates profits over $500,000 they are taxed at around 26.5%.

Although in practice the concept of integration does not work perfectly, for corporations that earn under $500,000 it has been close. Unfortunately, this is not true for corporations that earn over $500,000. To address this imbalance, the idea of eligible dividends was introduced in 2006. The result is that if a dividend is declared as an eligible dividend instead of a regular dividend, the tax treatment in the hands of the individual is lower to offset the higher tax rate in the company.

Eligible dividends cannot be declared indiscriminately, they have to be paid out of a pool of income that was subject to the high rate of tax, otherwise known as General Rate Income Pool (GRIP). The tax savings can be quite extensive. For example, assuming the individual taxpayer pays tax at the high rate, a $50,000 eligible dividend will incur taxes in BC of approximately $10,700, while a regular dividend of the same amount will incur taxes in BC of approximately $16,900. You do want to be careful if eligible dividends are declared in excess of the company’s GRIP balance because the company can be subject to significant penalties.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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