45 How are eligible, non-eligible and capital dividends taxed in the hands of an individual? Are there any other tax implications? Why do they have different tax treatments? 

Wahaj Awan

Eligible dividends are typically paid out by public corporations, from income that has been taxed at a higher corporate tax rate.

Non-eligible dividends are generally paid out by private corporations from income that has been taxed at a lower corporate tax rate.  Note public corporations may sometimes declare a portion of their dividends as non-eligible (if some of their income has been taxed at lower corporate rates).

Once eligible or non-eligible dividends have been received by an individual, they are subject to gross-up rates.   The grossed-up/taxable dividend is intended to reflect the corporate pre-tax income which is then taxed at the individual’s marginal tax rate. The individual is also given a dividend tax credit which is equivalent to the tax paid by the corporation on the dividends. (Refer to the Integration” topic for an example).

Rates as of 2021

Gross-up rate (See ITA 82(1)(b))

Federal dividend tax credit (See ITA 121)

Eligible dividends

38%

6/11

Non-eligible dividends

15%

9/13

(These rates can be found in the FITAC>Tax Rates and Tools under the heading “Eligible dividends reference tool”)

ITA 83(2) describes capital dividends as dividends paid by a corporation on the shares of the corporation’s capital stock.

ITA 83(2)(b) states “no part of the dividend shall be included in calculating the income of any shareholder of the corporation”. In other words, there is no tax on capital dividends.

Capital dividends are essentially the non-taxable 50% portion of a capital gain, which ‘flow-through’ tax free to the shareholder.

Suppose a private corporation has a capital gain of $2,000 and is paying out dividends on that amount. The tax treatment for the corporation and in the hands of the individual for this gain is as follows:

There will be no tax on $1,000 that is the non taxable portion of capital gain. the taxable portion would be taxed $130 in the corporation's hand at the given rate, then $400 in the individual's hand and the individual would be given a dividend tax credit of #130 leaving them with $600 after tax cash.
Example comparing non-eligible dividends and the non taxable portion of capital gain

In the above example you should note that the after tax cash is the same ($1,000 from the capital dividend and $600 from the non-eligible dividend) regardless of whether the capital gain was earned by the corporation (with dividends paid out to the shareholder) or earned directly by the individual.

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