"Eligible" means meeting the necessary requirements, qualifications, or criteria to participate in, receive, or do something. "Non-eligible" (or ineligible) means failing to meet those criteria, making one unqualified or disqualified from participating or receiving a benefit. The core difference is authorization versus disqualification.
Eligible means qualified or having the right to do or obtain something (e.g., "eligible for a loan"), while illegible means difficult or impossible to read, usually due to messy handwriting or faded text (e.g., "illegible signature"). The key difference is that eligible relates to qualification, while illegible relates to readability.
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.
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.
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.
To determine whether you should get a dividend, you need to look at two important dates. They are the "record date" or "date of record" and the "ex-dividend date" or "ex-date." When a company declares a dividend, it sets a record date when you must be on the company's books as a shareholder to receive the dividend.
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.
But it can also refer to printed words that are faded or for some other reason difficult to read. If you leave a book open in the rain, the print will probably become illegible. If you're walking in an old graveyard, the writing on the tombstones is often illegible.
"Eligible" means meeting the necessary requirements or conditions to be chosen, qualified, or allowed to do or receive something, such as being eligible for a scholarship, benefits, or marriage, signifying fitness, suitability, and entitlement based on specific criteria.
The amount of tax-free dividend income depends on your filing status and income level, with the 0% tax bracket applying to qualified dividends for single filers with taxable income up to $48,350 (2025), married couples up to $96,700, and heads of household up to $64,750. Beyond these income thresholds, dividends are taxed at 15% or 20%, but dividends in a Roth IRA are completely tax-free if withdrawals are qualified.
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.
There are two primary types of dividends:
Eligible dividends as non-eligible: You lose out on the higher dividend tax credit, resulting in a higher tax burden for shareholders. Non-eligible dividends as eligible: You may receive a tax credit you aren't entitled to, leading to a reassessment, penalties, and the requirement to repay the credit.
If there is no profit, then no dividends can be paid. Dividends can be paid to directors and other shareholders, according to the proportion of shares that they hold. There is no requirement to pay all the profits as dividends, or even any of them.
The amount of tax-free dividend income depends on your filing status and income level, with the 0% tax bracket applying to qualified dividends for single filers with taxable income up to $48,350 (2025), married couples up to $96,700, and heads of household up to $64,750. Beyond these income thresholds, dividends are taxed at 15% or 20%, but dividends in a Roth IRA are completely tax-free if withdrawals are qualified.
Warren Buffett doesn't dislike dividends but believes retaining earnings for reinvestment, acquisitions, and buybacks at Berkshire Hathaway creates more long-term value than paying them out, allowing for greater compounding and growth, though he supports dividends in companies where profits can't be reinvested profitably, like See's Candies. His core principle is that if Berkshire can generate more than $1 of market value for every $1 kept, shareholders are better off with retained earnings, a strategy proven effective by Berkshire's outperformance.
The 25% dividend rule is a special stock market regulation for large distributions, meaning if a dividend or distribution is 25% or more of the stock's value, the ex-dividend date (when buyers stop getting the dividend) shifts from usually the day before the record date to the first business day after the payment date, preventing price drops from unfairly affecting sellers and protecting margin accounts. It ensures the stock trades "cum dividend" (with the dividend included) longer, with the price adjusting downward only after the payment, preventing confusion and market disruption for large payouts.
Eligible dividends are generally received from public corporations (who do not receive the small business deduction) or private corporations with high earnings (net income over the $500,000 small business deduction). Those types of corporations pay corporate tax at higher rates than small businesses.
To receive a dividend, you must own the stock before the ex-dividend date, typically requiring you to buy it at least one day prior to this date for standard common stock, though for tax purposes (qualified dividends), you need a longer holding period: at least 61 days within a 121-day window around the ex-dividend date, starting 60 days before it.