Introduction
Most incorporated business owners know there are two types of dividends — eligible and non-eligible — and that they are taxed differently. Fewer understand precisely why they are different, what creates each type, and how the mix of the two affects the tax on corporate distributions.
This matters because the distinction is not cosmetic. The top marginal rate on eligible dividends in Ontario in 2026 is approximately 39.34%. The top marginal rate on non-eligible dividends is approximately 47.74%. On a $200,000 dividend, that difference is approximately $16,800 in personal tax.
Where the Difference Comes From
The difference between eligible and non-eligible dividends reflects the amount of corporate tax already paid on the income being distributed.
Eligible dividends are paid from income that has been taxed at the full general corporate rate — approximately 26.5% combined in Ontario. The income has already borne significant corporate tax. To prevent double taxation, shareholders receiving eligible dividends get an enhanced gross-up and a larger dividend tax credit.
Non-eligible dividends are paid from income that was taxed at the small business deduction rate — approximately 12.2% combined in Ontario. Because less corporate tax was paid on this income, the personal tax on the dividend is higher, to achieve approximate integration with the total tax that would have been paid personally.
In other words: eligible dividends are paid from "more taxed" corporate income, and the personal tax is lower. Non-eligible dividends are paid from "less taxed" corporate income, and the personal tax is higher. The total tax — corporate plus personal — is intended to be roughly equal to the personal marginal rate in both cases.
What Creates Each Type of Account
The Income Tax Act tracks the sources of corporate earnings through notional accounts:
General Rate Income Pool (GRIP): Tracks after-tax income from the general corporate rate — the source of eligible dividends. A corporation that earns income above the SBD limit, or that has been through a wind-up of a subsidiary taxed at the general rate, builds a GRIP balance that supports eligible dividend payments.
Low Rate Income Pool (LRIP) (for certain corporations): Tracks after-tax small business income that has flowed through from connected CCPCs. Relevant for holding companies receiving dividends from an operating CCPC.
Default for CCPCs: A CCPC that pays a dividend from retained earnings that are not specifically tracked in the GRIP pays a non-eligible dividend by default.
The Practical Implication for Most Incorporated Professionals
Most professionals whose corporations earn primarily within the SBD limit — physicians, dentists, lawyers, architects — will be paying non-eligible dividends from their accumulated retained earnings. Their entire retained earnings pool was taxed at approximately 12.2%, and dividends from those earnings are non-eligible.
The only way to pay eligible dividends is to have income that was taxed at the general rate — which typically means:
Income above the $500,000 SBD limit (taxed at 26.5%)
Income in a holdco that received eligible portfolio dividends from public companies
Certain other general-rate income
For a physician earning $300,000 whose entire income is within the SBD, virtually all dividends will be non-eligible. For a physician earning $800,000 — with $300,000 above the SBD limit taxed at the general rate — there is a GRIP balance supporting eligible dividend payments for that portion.
Planning the Dividend Mix
Where a corporation has both eligible and non-eligible retained earnings, the order in which dividends are paid matters:
A corporation with both GRIP and non-GRIP retained earnings can choose to pay eligible dividends first (at the lower personal rate), managing the timing of non-eligible dividends to years where total personal income is lower.
The CRA requires the corporation to track its GRIP accurately and designate dividends as eligible or non-eligible at the time of declaration. Misdesignating a non-eligible dividend as eligible — paying out more than the GRIP balance supports — results in an excessive eligible dividend penalty (Part III.1 tax) of 20% of the excess.
When to Speak With a CPA
For corporations that have been accumulating both GRIP and non-GRIP retained earnings — particularly those with income above the SBD limit in some years — the dividend designation decision requires annual review of the GRIP balance and a deliberate choice about which type of dividend to declare.