Eligible dividends are generally better for shareholders because they are taxed at a lower personal rate due to a higher dividend tax credit (38% gross-up in Canada). These dividends come from higher-taxed corporate income, whereas non-eligible dividends (15% gross-up) come from lower-taxed small business income, resulting in a higher, less favorable tax bill for the recipient.
Eligible dividends come with an enhanced dividend tax credit, which is why they are taxed more favourably than non-eligible dividends. Non-eligible dividends — taxed less favourably. These are paid out by Canadian private corporations (small businesses) that pay corporate tax at a lesser rate.
Qualified dividends are more favorable for investors because they're taxed at the lower long-term capital gains rate. Ordinary dividends, also known as nonqualified dividends, are taxed at the higher ordinary income tax rate.
Non-eligible dividends, generally paid from income subject to lower small business and passive income tax rates, are taxed in the hands of the shareholder ranging from 35.98%-47.34% (depending on Province/Territory). RDTOH, a notional tax account balance, is refunded to the corporation when a taxable dividend is paid.
Non-eligible dividends are taxed at a higher personal income tax rate than eligible dividends. The reason? They come with a lower dividend tax credit, which means less tax relief for you as a shareholder. Corporations that have not paid tax at the general corporate tax rate.
To avoid taxes on dividends, hold them in a Roth IRA for tax-free growth and withdrawals, use a Traditional IRA/401(k) to defer taxes until retirement (often a lower bracket), invest in tax-advantaged education accounts, or if your income is low enough, qualify for the zero percent long-term capital gains rate on qualified dividends in a standard brokerage account. Some dividends, like a return of capital, aren't taxed, and you can also manage withholding by adjusting your W-4 to avoid penalties, notes the IRS.
There are two broad categories of taxable dividends: eligible and non-eligible dividends. The difference has a significant impact on the gross up rate. Per section 82(1)(b) of the ITA, eligible dividends receive a 38% gross up, while non-eligible dividends receive a 15% gross up.
TDS will not be applicable for individuals if the aggregate of total dividend paid to them by the Company during the financial year does not exceed Rs. 5,000. Dividend from foreign companies: Receiving dividends from a foreign entity can sometimes mean you're taxed twice: once in the source country and then in India.
Nonqualified dividends are taxed at ordinary income tax rates, which range from 10% to 37% in 2025. Therefore, individuals in higher tax brackets will pay more on nonqualified dividends compared to qualified ones.
A corporation designates a dividend as an eligible dividend by notifying, in writing, each person to whom any dividend is paid that the dividend is an eligible dividend so that the recipient individual can claim the appropriate gross-up and DTC.
LTCG and qualified dividends do not affect tax on normal income, they get added on after that's been calculated. So no, they would not push you into a different tax bracket.
Tax on nonqualified dividends
The primary drawback of nonqualified dividends is that the IRS taxes them at higher rates than qualified dividends. The IRS taxes nonqualified dividends at the same rate as an investor's ordinary income tax rate, which is often referred to as your marginal tax rate.
Non-Eligible RDTOH (NERDTOH)
This typically includes income such as interest, foreign dividends, and certain rental incomes. When a corporation pays non-eligible dividends to its shareholders, it can receive a refund from its NERDTOH account at a rate of $30 for every $100 paid out.
Ultimately, the best decision depends on personal income levels, tax brackets, and the company's financial situation. Those in lower tax brackets may benefit from a salary bonus, while high earners typically find dividends to be the more tax-efficient choice.
The tax-free limit was removed, and now all dividends are taxable based on your income tax slab rate. There's no longer a specific tax-free amount for dividends. However, companies only deduct tax at source (TDS) if your total dividend income exceeds Rs. 5,000 in a year.
Eligible dividends are paid by corporations from income that has been taxed at the general corporate tax rate. These dividends are subject to a higher gross-up (38%) and come with a higher dividend tax credit, resulting in lower personal tax rates for shareholders.
If you receive over $1,500 of taxable ordinary dividends, you must report these dividends on Schedule B (Form 1040), Interest and Ordinary Dividends.
To avoid taxes on dividends, hold them in a Roth IRA for tax-free growth and withdrawals, use a Traditional IRA/401(k) to defer taxes until retirement (often a lower bracket), invest in tax-advantaged education accounts, or if your income is low enough, qualify for the zero percent long-term capital gains rate on qualified dividends in a standard brokerage account. Some dividends, like a return of capital, aren't taxed, and you can also manage withholding by adjusting your W-4 to avoid penalties, notes the IRS.
Eligible dividends are taxed more favourably than non-eligible dividends because the corporation has paid tax at higher rates and the individual receiving the dividend pays less. Dividends are taxed at lesser rates than employment income and many other types of income in your hands personally.
You can earn a significant amount of qualified dividends before paying federal tax (0% rate) if your income falls within the 0% tax bracket, which is up to $48,350 for single filers and $96,700 for married couples filing jointly in 2025, but you must report all dividends over $10 and potentially file Schedule B if you receive over $1,500 in ordinary dividends. Non-qualified dividends are taxed at your ordinary income rate, while qualified dividends (from U.S. corps or qualified foreign corps) get lower 0%, 15%, or 20% rates, with higher earners potentially facing a 3.8% Net Investment Income Tax.