Dividends: Ineligible versus Eligible
You may (or may not) have heard the terms “non-eligible” (also referred to as ineligible) and “eligible” dividends. What’s the difference? This article will briefly touch on what a dividend is and, at least in the tax world, the difference between these two types.
In broad terms, a dividend is a distribution of profits by a corporation to its shareholders on a per-share basis. Subject to any other specific agreements or requirements applicable to a particular company, and in accordance with its Articles of Incorporation, a company, through its Board of Directors, would determine what dividends are to be declared including when, how much and how they’re to be paid. These decisions of the Board would be documented by way of a resolution of the Board, either at a properly constituted meeting or in a signed consent resolution, and would set out the class(es) of shares entitled to receive the dividend, as well as the amount declared. For example, the Board of Directors may vote to approve a dividend of $3.00 per share to the Class A Common shareholders (check back soon to read our article on the different share classes). Each shareholder that holds Class A Common shares would then be entitled to receive that dividend based on the number of shares they hold (i.e. if someone held 10 Class A Common shares, they would receive a total dividend of $30.00).
In Canada, dividend tax rates may be distinguished between eligible and non-eligible dividends. Corporations are required to track their differently taxed “pools” of corporate income. The general rate income pool or “GRIP” is a pool of highly taxed active business income in a corporation. The dividends that are paid out of this pool qualify as eligible dividends. These dividends entitle the recipient to a higher dividend tax credit which ultimately reduces the effective tax rate on that dividend.
Non-eligible dividends, however, include dividends that are paid from active business income of a corporation that was taxed at a lower rate. These businesses are often eligible for the Small Business Deduction (a corporate tax reduction enacted in the Income Tax Act) if considered a Canadian Controlled Private Corporation (CCPC), meaning they will pay a higher tax rate on the same dollar figure of dividends than they would if it was declared as an eligible dividend.
Please let us know if you have any questions regarding dividends or your business. We would be pleased to answer any questions you may have with regards to the above or any other legal matter.
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of business law at the following:
Jane Otterstrom: firstname.lastname@example.org
Una Kuzio: email@example.com