How Dividends Are Taxed in Canada: Eligible vs Non-Eligible

The problem the system is trying to solve

A Canadian dividend is paid out of profit the corporation has already paid tax on. If you were then taxed on that dividend at your full personal rate, the same dollar of income would be taxed twice: once in the company and once in your hands.

Canada addresses this with a mechanism called integration. The goal is that a dollar earned through a corporation and paid out to you ends up taxed at roughly the same total rate as a dollar you earned directly. It works in two steps that only make sense together.

Step one: the gross-up

Before the dividend enters your taxable income it is inflated, or grossed up. Eligible dividends are grossed up by 38%, non-eligible dividends by 15%. The grossed-up figure is an estimate of what the corporation earned before it paid its own tax.

So a $10,000 eligible dividend adds $13,800 to your taxable income, not $10,000. A $10,000 non-eligible dividend adds $11,500.

On its own this looks like a penalty, and taken alone it is. It only makes sense with step two.

Step two: the dividend tax credit

You then claim two non-refundable credits, one federal and one provincial, each calculated as a fixed percentage of the grossed-up amount. Federally that is 15.0198% for eligible dividends and 9.0301% for non-eligible ones.

The provincial rate depends on where you live and the spread is wide. British Columbia gives 12% on eligible dividends, Ontario gives 10%, Newfoundland and Labrador gives 6.3%. Two people with identical incomes and identical portfolios can pay noticeably different tax on the same dividend simply because of the province on their return.

The credits reduce your total tax bill, not just the tax sitting on the dividend line. That distinction matters more than it sounds, and it is why published marginal rates on eligible dividends can be very low or even negative at modest incomes: the credit is large enough to shelter some of your other income too.

Eligible versus non-eligible: one word, a large difference

The two types exist because they came out of income taxed at different corporate rates.

Eligible dividends come from corporate income taxed at the general rate. More corporate tax was already paid, so the gross-up and the credit are both larger and your personal tax is lower. Almost every dividend from a Canadian public company listed on the TSX is eligible.

Non-eligible dividends, sometimes called ordinary dividends, come from income that received the small business deduction. Less corporate tax was paid, so the gross-up and credit are smaller and you pay more. If you own a Canadian-controlled private corporation and pay yourself dividends, these are usually what you receive.

Your T5 slip separates them: box 24 and 25 for eligible, box 10 and 11 for non-eligible. Tax software reads the boxes automatically, which is exactly why most people never notice the machinery at all.

A worked example: Ontario, $80,000 of other income

Elena earns $80,000 from her job and receives $10,000 of eligible dividends from Canadian bank shares in a non-registered account. Here is what happens on her 2026 return.

The dividend

The $10,000 is grossed up by 38% to $13,800, which is added to her taxable income, taking it from $80,000 to $93,800.

At her bracket, the federal tax on that $13,800 is about $2,829 and the Ontario tax is about $1,263.

She then claims the federal dividend tax credit of 15.0198% of $13,800, which is $2,073, and the Ontario credit of 10% of $13,800, which is $1,380.

Federally she is left with about $756 of tax. In Ontario the $1,380 credit exceeds the $1,263 of provincial tax on the dividend, so the surplus reduces the Ontario tax on her salary instead. Net across both levels, the dividend costs her roughly $639, an effective rate of about 6.4%.

The same money three other ways

Same $10,000, three answers, a $2,326 spread between the best and worst outcome. Salary is worse again than shown, because it also attracts CPP and EI contributions that interest does not.

You can run your own numbers, province and income included, in the dividend tax calculator.

What the gross-up quietly costs you

Here is the part that catches retirees, and it is the most expensive detail in this article.

The grossed-up figure, not the cash you received, is what appears in your net income. Several income-tested benefits are calculated on net income, and crucially they are calculated before any tax credits are applied. The dividend tax credit does nothing to reverse the effect.

Old Age Security clawback, the Canada Child Benefit, the age credit, the GST/HST credit and a range of provincial benefits are all measured against a number the gross-up has pushed up. For someone near the OAS clawback threshold, $10,000 of eligible dividends adds $13,800 to the income the clawback is measured against, even though only $10,000 reached the bank account.

That can turn an apparently tax-efficient income source into an expensive one. It is worth checking before restructuring a retirement portfolio toward Canadian dividend payers.

Where dividends belong

Two rules cover most situations.

Canadian dividends are the most tax-efficient income type in a non-registered account. If something has to sit in a taxable account, Canadian dividend payers are a reasonable candidate precisely because of the credit.

Unless the gross-up costs you a benefit. If you are near an OAS clawback threshold or receiving income-tested benefits, holding the same shares inside a TFSA removes the gross-up, the credit and the net income problem in one move.

One exception worth knowing: US and other foreign dividends get no gross-up and no credit. They are taxed as ordinary income at your full rate and usually carry foreign withholding tax on top. The dividend tax credit is a Canadian-corporation benefit only.

The short version

• Canadian dividends are grossed up (38% eligible, 15% non-eligible), taxed at your ordinary rates, then reduced by a federal and a provincial credit.
• Eligible dividends cost meaningfully less tax than non-eligible ones, and both cost far less than interest.
• The gross-up inflates net income, which affects income-tested benefits before any credit is applied.
• The provincial credit varies widely, so your province changes the answer.

Run Your Own Numbers

Enter your province, income and dividend amounts to see the gross-up, both credits, your marginal rate on each dividend type and how the result compares to receiving the same money as interest.