Dividend tax rate Canada: what small business owners need to know

Published Friday 31 July 2026

Table of contents

• How dividends are taxed in Canada
• Eligible vs. non-eligible dividends
• Federal and provincial dividend tax rates
• How to calculate tax on dividends in Canada
• Salary vs. dividends: which is better for small business owners?
• How to report dividend income
• Simplify your small business finances with Xero
• FAQs on dividend tax rates in Canada

Key takeaways

• Canada taxes dividends through a gross-up and tax credit system, which means the dividend tax rate you actually pay depends on whether your corporation pays eligible or non-eligible dividends.
• Non-eligible dividends (the most common type for Canadian-controlled private corporations) are grossed up by 15% and carry a smaller tax credit, resulting in a higher personal tax bill than eligible dividends.
• Choosing between salary and dividends affects your CPP contributions, RRSP room, and overall tax bill, so the right mix depends on your personal financial situation.
• You'll need to file T5 slips by the end of February each year and report dividend income on your personal tax return using Lines 12000, 12010, and 40425.

How dividends are taxed in Canada

When you pay yourself dividends from your incorporated small business, the amount you’re taxed on isn’t simply the cash you receive. Instead, the federal government uses a gross-up and dividend tax credit (DTC) system designed to reduce double taxation on corporate income.

Your corporation earns income and pays corporate tax on it first. When you then distribute those after-tax profits as dividends, you've already been taxed once at the corporate level. The gross-up and DTC system accounts for that by adjusting what you report on your personal return.

The process follows three steps:

1. Gross-up. You add a percentage to your actual dividend amount to arrive at a "taxable dividend." This grossed-up figure represents the estimated pre-tax corporate income that funded your dividend.
2. Calculate personal tax. You pay federal and provincial income tax on the grossed-up (larger) amount, just as you would on employment income.
3. Apply the dividend tax credit. You then subtract the DTC from your tax owing. This credit approximates the corporate tax already paid, so you aren't taxed twice on the same income.

The result is that your effective dividend tax rate in Canada is typically lower than what you'd pay on the same amount of employment income. However, the exact rate depends on the type of dividend, your province, and your personal tax bracket.

It's worth noting that this system applies specifically to dividends from taxable Canadian corporations. If you receive dividends from foreign corporations, different rules apply, and you won't receive the Canadian DTC.

Eligible vs non-eligible dividends

Not all dividends are treated equally under Canadian tax law. The type of dividend paid determines the gross-up rate and the size of the tax credit you receive. They're split into two categories: eligible and non-eligible dividends.

Eligible dividends

Eligible dividends come from corporate income earned by Canadian corporations that was taxed at the general (higher) corporate tax rate. The general federal corporate rate is 15%, and the combined federal-provincial rate falls between 23% and 31%, depending on the province. Large public corporations usually pay eligible dividends, but a Canadian-controlled private corporation (CCPC) can also pay them if it has income taxed at the general rate.

Eligible dividends receive more favourable personal tax treatment because more corporate tax has already been paid. The key figures for eligible dividends are:

• Gross-up rate: 38% of the actual dividend amount.
• Federal dividend tax credit: 15.0198% of the grossed-up amount.

For a small business owner in the lowest federal tax bracket, the effective marginal tax rate on eligible dividends is actually negative at -0.72%. That means the federal tax credit more than offsets the personal tax owing, giving you a small net credit.

Non-eligible dividends

Non-eligible dividends come from income earned by Canadian corporations that was taxed at the small business rate. The federal small business rate is 9%, with combined federal-provincial rates ranging from 9% to 12.2%, depending on the province. If you own a CCPC earning active business income under the small business deduction limit ($500,000 in most provinces, but up to $700,000), dividends you pay from that income are almost always non-eligible.

Because less corporate tax was paid upfront, the personal tax treatment is less generous. The key figures for non-eligible dividends are:

• Gross-up rate: 15% of the actual dividend amount.
• Federal dividend tax credit: 9.0301% of the grossed-up amount.

At the lowest federal bracket, the effective marginal rate on non-eligible dividends is 6.29%. That's still lower than the rate on regular employment income, but noticeably higher than for eligible dividends.

For most small business owners operating a CCPC, non-eligible dividends will be the primary type you pay. This is because your active business income is generally taxed at the small business rate, which means the corresponding dividends must be designated as non-eligible.

GRIP and LRIP: tracking your dividend capacity

Your corporation needs to track which type of dividends it can legally pay. Two dedicated accounts help with this.

The General Rate Income Pool (GRIP) tracks income your CCPC earned that was taxed at the general corporate rate. You can only designate dividends as eligible up to your GRIP balance. This pool accumulates over time as your corporation earns income above the small business deduction limit or receives eligible dividends from other corporations.

The Low Rate Income Pool (LRIP) works in the opposite direction. It applies to corporations that are not CCPCs (for example, if your company loses its CCPC status) and tracks income that was taxed at the small business rate. Any dividends paid while there's a positive LRIP balance must be designated as non-eligible.

Getting this designation wrong has real consequences. If you designate more eligible dividends than your GRIP balance allows, the CRA can apply a Part III.1 tax of 20% on the excess amount. This penalty is in addition to the regular tax your shareholders pay on the dividend. Your accountant can help you calculate these balances each year to avoid costly mistakes.

Federal and provincial dividend tax rates

Your total dividend tax rate in Canada combines federal and provincial components. Each province and territory sets its own dividend tax credit rates on top of the federal rate, so two business owners receiving identical dividends can pay very different amounts of tax depending on where they live.

At the federal level, the dividend tax rate depends on your marginal tax bracket and the type of dividend. For someone in the lowest bracket, the combined federal rates after credits are:

• Eligible dividends: -0.72% (a net credit).
• Non-eligible dividends: 6.29%.

Provincial rates vary on top of the federal rate , depending on the province and dividend type. Here's how some key provinces compare for dividend tax rates:

• Alberta and Ontario tend to have lower combined dividend tax rates than most other provinces, making them more favourable for business owners paying themselves dividends.
• British Columbia falls in the middle range for both eligible and non-eligible dividend rates.
• Nova Scotia, Prince Edward Island, and Newfoundland and Labrador have the highest combined rates.
• Quebec has its own unique dividend tax credit system that differs from the federal structure.

Because provincial rates vary so widely, it's important to check your province's current dividend tax credit rate or use a dividend tax calculator for Canada to estimate your total bill.

2026 federal tax changes that affect dividends

The federal government reduced the lowest personal income tax bracket rate to 14% for the 2026 tax year and beyond

For small business owners in the lowest bracket, the reduction means slightly less federal tax on your grossed-up dividend income. The dividend tax credit percentages remain unchanged, so the net effect is a modest improvement in your after-tax dividend income.

How to calculate tax on dividends in Canada

Calculating dividend tax in Canada involves three steps: grossing up the dividend, applying your marginal tax rate, then subtracting the dividend tax credit. Here's how that looks in practice with two examples, both assuming $10,000 in actual dividends received and the lowest federal tax bracket of 14%.

Example 1: $10,000 in eligible dividends

Follow these steps to calculate federal tax on eligible dividends.

1. Gross up the dividend: $10,000 x 38% = $3,800 gross-up. Your taxable dividend is $13,800.
2. Calculate federal tax: $13,800 x 14% = $1,932.
3. Apply the dividend tax credit: $13,800 x 15.0198% = $2,073.
4. Determine net federal tax: $1,932 - $2,073 = -$141.

The result is a net federal tax credit of $141. You'd actually receive a small credit rather than owing federal tax on this amount. Provincial tax would still apply, but the federal portion works in your favour at this income level.

This negative federal rate is why eligible dividends are so tax-efficient. If your corporation has GRIP room available, paying eligible dividends can significantly reduce your overall personal tax burden.

Example 2: $10,000 in non-eligible dividends

The same steps apply, but with different gross-up and credit rates.

1. Gross up the dividend: $10,000 x 15% = $1,500 gross-up. Your taxable dividend is $11,500.
2. Calculate federal tax: $11,500 x 14% = $1,610.
3. Apply the dividend tax credit: $11,500 x 9.0301% = $1,038.
4. Determine net federal tax: $1,610 - $1,038 = $572.

You'd owe $572 in net federal tax on $10,000 of non-eligible dividends. That's an effective federal rate of about 5.72%, which is still lower than the 14% rate on regular employment income.

Keep in mind these examples show federal tax only. Your total tax bill will also include provincial tax, offset by a provincial dividend tax credit, which varies by province and income bracket.

Salary vs dividends: which is better for small business owners?

So should you pay yourself a salary or dividends?

Each option has trade-offs that go beyond the headline tax rate, and the right answer depends on your personal circumstances.

Dividends offer several potential advantages for small business owners:

• Avoid Canada Pension Plan (CPP) contributions, which can save you thousands per year in combined employer and employee premiums.
• Face potentially lower personal tax rates compared to the same amount of salary, depending on your province and bracket.
• Avoid the need to calculate and remit payroll source deductions each pay period.
• Allow your corporation to retain more earnings at the lower small business tax rate until you need to withdraw them.

Salary has its own set of benefits that dividends can't provide:

• Create RRSP contribution room (18% of earned income, up to the annual limit), which gives you a powerful long-term tax deferral tool.
• Build CPP entitlement for retirement, disability, and survivor benefits.
• Count as a deductible expense for the corporation, reducing its taxable income dollar for dollar.
• May be required to demonstrate reasonable compensation if the CRA reviews your file.

Because of these trade-offs, most small business owners find that paying themselves a combination of both salary and dividends works best – enough salary to maximize RRSP room and build adequate CPP entitlement, with the remainder taken as dividends for tax efficiency. Your ideal mix depends on your total income level, province of residence, age, retirement plans, and whether you have other sources of earned income.

It's also worth considering your corporation's year-end timing and cash flow. Salary must be paid in the year it's deducted by the corporation, while dividends can be declared and paid at different times. A tax professional or accountant can model different scenarios to find the split that works best for your situation.

How to report dividend income

Paying dividends from your corporation involves specific reporting requirements at both the corporate and personal levels. Missing deadlines or filing incorrectly can result in penalties, so it's worth understanding each step of the process.

Here's what you need to do each year when you pay dividends.

1. Pass a directors' resolution. Before paying dividends, your corporation's board of directors must formally declare the dividend. This resolution should state the total amount, the type (eligible or non-eligible), the record date, and the payment date. Keep this document on file as part of your corporate minute book.
2. Designate the dividend type. If you're paying eligible dividends, you must formally designate them as such at the time of payment. This designation is typically included in the directors' resolution. Failing to make a timely designation means the dividends default to non-eligible. Designating more eligible dividends than your GRIP balance allows triggers a Part III.1 tax of 20% on the excess.
3. Issue T5 slips. For every shareholder who receives dividends totalling $50 or more, your corporation must prepare a T5 Statement of Investment Income. T5 slips are due by the end of February following the calendar year the dividend was paid. You'll file these with the CRA and provide copies to each recipient.
4. Report on your personal tax return. When you file your personal income tax return, report the taxable (grossed-up) amount of all dividends on Line 12000 – both eligible and non-eligible dividends. Report non-eligible dividends from Canadian sources again on Line 12010. Claim your federal dividend tax credit on Line 40425.

Keep organized records of all dividend declarations, resolutions, and T5 filings. Good record-keeping simplifies year-end tax preparation and protects you if the CRA ever requests documentation to support your filings.

Simplify your small business finances with Xero

Managing dividend payments, tracking corporate income, and staying on top of tax deadlines takes time you could spend growing your business. Xero's cloud accounting software helps small business owners organize their finances in one place, with real-time reporting that makes it easier to work with your accountant at tax time.

Whether you're deciding between salary and dividends or preparing for year-end filing, having accurate, up-to-date financial records simplifies the process. Get one month free and see how Xero can help you stay on top of your finances.

FAQs on dividend tax rates in Canada

Here are answers to common questions Canadian small business owners have about how dividends are taxed.

What is the difference between eligible and non-eligible dividends in Canada?

Eligible dividends come from corporate income taxed at the general (higher) rate and receive a 38% gross-up with a larger tax credit. Non-eligible dividends come from income taxed at the small business rate, receive a 15% gross-up, and carry a smaller credit, resulting in a higher personal tax bill.

Do you pay CPP on dividend income?

No. Dividends are not subject to CPP contributions. This can save you thousands per year compared to salary, but it also means you won't build CPP retirement or disability entitlement from dividend income.

Can a CCPC pay eligible dividends?

Yes, a CCPC can pay eligible dividends, but only from income that was taxed at the general corporate rate. Your corporation's GRIP balance tracks how much you can designate as eligible each year.

What happens if you designate too many eligible dividends?

The CRA applies a Part III.1 tax of 20% on the excess eligible dividend amount. Your accountant should review your GRIP balance before each dividend declaration to avoid this penalty.

Is it better to pay yourself a salary or dividends from your corporation?

It depends. Dividends can be more tax-efficient and avoid CPP premiums, while salary creates RRSP room and builds CPP entitlement. Most small business owners benefit from a blended approach tailored to their specific circumstances.