What is an eligible dividend?

An eligible dividend is a dividend paid in money to a resident of Canada by a business corporation, whether of Quebec or Canadian jurisdiction, and which is designated by this business corporation as constituting an eligible dividend; then it is a taxable dividend for the shareholder who receives it.

Revenues of the business corporation are added to a special account, called the general rate income pool or GRIP. GRIP contains the revenues of a business corporation that have not been affected by deductions for small businesses or any other special tax deduction. The goal of GRIP is to be able to distribute the revenues accumulated in that account while allowing them to be taxed appropriately, because an eligible dividend provides for a more generous gross-up and tax credit for dividends.

Eligible dividends are generally payable at the time of the declaration of such dividends.

Any shareholder concerned must then be notified, for the purpose of preparing his tax return, that the dividend declared to him is "eligible". Generally, the business corporation will send to these shareholders a letter to that effect or at the time of payment, it can attach a check stub indicating that it is an eligible dividend. Other forms of notification considered as being acceptable include a notice given on the website of the business corporation, in the quarterly or annual reports of the business corporation, in the newsletters to shareholders or in other similar publications of the business corporation.

The possibility for a business corporation to pay eligible dividends to its shareholders depends in particular on its status. Indeed, an eligible dividend is usually paid by a business corporation whose income is subject to the general tax rate (higher) of the business corporations rather than to the rate of small businesses. Consequently, the eligible dividend is then subject, therefore, to a lower tax rate in the hands of shareholders who receive it.

On the contrary, a dividend considered as constituting a non-eligible dividend, is the one received from a business corporation that has paid same to its shareholders out of its business income that is admissible to the small business deduction granted to small businesses, the SBD.