Canadian dividends are taxed in two steps: you add a gross-up to the dividend you actually received, then claim a dividend tax credit that reflects tax the corporation has already paid. For 2026, eligible dividends are grossed up by 38% and non-eligible dividends by 15%, and each type has its own federal and Ontario credit.
This guide explains the difference between eligible and non-eligible dividends, the 2026 rates, a worked example on $1,000 of each, and a 2027 change to Ontario’s credit that matters for owner-managers who pay themselves dividends.
Table of Contents
- How dividends are taxed in Canada
- Eligible vs non-eligible dividends
- 2026 gross-up and dividend tax credit rates
- Worked example: $1,000 of each type
- Ontario’s 2027 change for non-eligible dividends
- Dividends vs salary for business owners
- Foreign dividends and dividends in registered accounts
- How BBA Tax helps
- Frequently Asked Questions
Key Takeaways
- Eligible dividends: 38% gross-up, a federal credit of 15.0198% of the grossed-up amount, and an Ontario credit of 10%.
- Non-eligible dividends: 15% gross-up, a federal credit of 9.0301% of the grossed-up amount, and an Ontario credit of 2.9863% in 2026.
- From January 1, 2027, Ontario’s credit on non-eligible dividends drops to 1.9863%. The eligible rate stays at 10%.
- Dividends from foreign companies do not get the dividend tax credit.
- Dividends do not create RRSP room or CPP contributions, and dividends to family members can be caught by the tax on split income (TOSI).
How dividends are taxed in Canada
You are taxed on more than the dividend you received, then given a credit back. The idea is to avoid taxing the same profit twice in full: the corporation paid tax first, so the gross-up approximates the pre-tax profit behind your dividend, and the credit approximates the corporate tax already paid.
On your return, the grossed-up amount of all taxable dividends from Canadian corporations goes on line 12000 (non-eligible dividends are also shown on line 12010), and the federal dividend tax credit is claimed on line 40425. Ontario’s credit is calculated on Form ON428. Your T5 slip shows the actual amount, the taxable amount and the federal credit for each type.
Because the grossed-up amount is what goes into your income, dividends raise your net income by more than the cash you received. That matters for income-tested benefits, including the Old Age Security recovery tax, which is based on net income.
Eligible vs non-eligible dividends
The type depends on how much tax the corporation paid on the profits behind the dividend.
- Eligible dividends are taxable dividends that a Canadian corporation designates as eligible. Public companies can generally pay them, and a Canadian-controlled private corporation (CCPC) can pay them out of its general rate income pool, which reflects income that did not get the small business deduction or another special rate.
- Non-eligible dividends (the CRA calls them dividends “other than eligible dividends”) are all other taxable dividends from Canadian corporations. Dividends a small CCPC pays from income taxed at the small business rate are generally non-eligible.
A corporation has to designate an eligible dividend in writing at or before the time it is paid, for example in a letter to shareholders, on the dividend cheque stub, or in the minutes when all shareholders are directors. On the T5 slip, eligible dividends appear in boxes 24 to 26 and non-eligible dividends in boxes 10 to 12.
2026 gross-up and dividend tax credit rates
Both credits are calculated on the grossed-up (taxable) amount, not on the cash dividend. Here are the 2026 rates, with the Ontario rate already listed for 2027:
| Rate | Eligible dividends | Non-eligible dividends |
|---|---|---|
| Gross-up | 38% (report 138% of the dividend) | 15% (report 115% of the dividend) |
| Federal dividend tax credit | 15.0198% of the grossed-up amount | 9.0301% of the grossed-up amount |
| Ontario dividend tax credit, 2026 | 10% | 2.9863% |
| Ontario dividend tax credit, 2027 | 10% | 1.9863% |
The federal credit equals 6/11 of the gross-up for eligible dividends and 9/13 of the gross-up for non-eligible dividends. The CRA’s T5 instructions describe these federal rates as applying to eligible dividends paid in 2012 or later and non-eligible dividends paid in 2019 or later.
Worked example: $1,000 of each type
Here is how $1,000 of each type of dividend is treated in 2026 for an Ontario resident.
| Step | $1,000 eligible dividend | $1,000 non-eligible dividend |
|---|---|---|
| Taxable amount added to income | $1,380 | $1,150 |
| Federal dividend tax credit | $207.27 | $103.85 |
| Ontario dividend tax credit (2026) | $138.00 | $34.34 |
| Total credits (2026) | $345.27 | $138.19 |
| Ontario dividend tax credit (2027) | $138.00 | $22.84 |
Your actual tax depends on your bracket: you pay tax on the grossed-up amount at your marginal rates, then subtract the credits. The much larger credit on eligible dividends is why they are generally taxed less in your hands than non-eligible dividends.
Ontario’s 2027 change for non-eligible dividends
From January 1, 2027, Ontario’s dividend tax credit on non-eligible dividends falls from 2.9863% to 1.9863% of the grossed-up amount. The eligible dividend credit stays at 10%.
The 2026 Ontario Budget announced the change to line up with the cut in Ontario’s small business corporate rate from 3.2% to 2.2% on July 1, 2026. The corporation now pays less tax on small business income, and the shareholder gets a smaller credit when that income comes out as a dividend.
In the example above, the change means $11.50 less Ontario credit per $1,000 of non-eligible dividends, so $11.50 more Ontario tax, and potentially more if you pay the Ontario surtax. If you planned to pay yourself non-eligible dividends early in 2027, review the timing with your accountant before December 31, 2026.
Paying yourself dividends from your corporation? BBA Tax can compare salary and dividends for your 2026 and 2027 plans before year-end. Book a free intro call.
Dividends vs salary for business owners
If you own a corporation, the dividend rates are only half the picture. The other half is salary, and the trade-offs go beyond tax rates.
- RRSP room. Salary is earned income for RRSP purposes; dividends are not. An owner paid only in dividends builds no new RRSP room.
- CPP. CPP contributions are deducted from salary, wages and other employment pay, not from dividends. That avoids the employee and employer contributions (up to $4,230.45 each for base and first additional CPP in 2026), but you are not building CPP retirement benefits on that income.
- Corporate deduction. Salary is deducted from the corporation’s income; dividends are paid from profits the corporation has already paid tax on.
- Paperwork. Salary needs payroll and a T4. Dividends need a T5 slip, due by March 1, 2027 for dividends paid in 2026.
Our salary vs dividend calculator compares the two for Ontario, and our guide to 2026 corporate tax rates explains the corporate side. Dividends paid to a spouse or adult children who own shares can be taxed at the top rate under TOSI unless an exclusion applies; our guide to income splitting in Canada covers the tests.
Foreign dividends and dividends in registered accounts
Only dividends from taxable Canadian corporations get the gross-up and credit. Foreign dividends do not qualify for the dividend tax credit. You report them in Canadian dollars on line 12100, using the Bank of Canada exchange rate for the day you received them, without subtracting foreign tax withheld. You may be able to claim a foreign tax credit for that tax.
Inside a TFSA, dividends are generally tax-free, even when you withdraw them. Inside an RRSP or RRIF they are not taxed when paid, but withdrawals are taxed as regular income, not as dividends. Our RRSP vs TFSA guide explains how the two accounts compare.
How BBA Tax helps
BBA Tax prepares corporate and personal returns for owner-managers in Ottawa and across Canada, including the T5 slips your corporation issues when it pays dividends. We can model salary and dividends before you pay yourself, check whether a dividend can be designated eligible, and make sure each shareholder reports the right amounts.
See our corporate tax services, or our tax planning for incorporated business owners if you want to plan 2026 and 2027 together.
Frequently Asked Questions
What is the dividend tax credit rate for 2026?
Federally, it is 15.0198% of the grossed-up amount for eligible dividends and 9.0301% for non-eligible dividends. In Ontario it is 10% for eligible dividends and 2.9863% for non-eligible dividends in 2026. All of these rates apply to the taxable (grossed-up) amount shown on your T5 slip, not to the cash you received.
Why are eligible dividends taxed less than non-eligible dividends?
The corporation paying an eligible dividend generally paid tax at the higher general corporate rate, so the shareholder gets a larger gross-up and a larger credit to make up for it. Non-eligible dividends usually come from income taxed at the lower small business rate, so the personal credit is smaller.
What changes for Ontario dividends in 2027?
From January 1, 2027, Ontario’s dividend tax credit on non-eligible dividends drops from 2.9863% to 1.9863% of the grossed-up amount, while the eligible rate stays at 10%. On a $1,000 non-eligible dividend, that is $11.50 less Ontario credit, and possibly more extra tax if you pay the Ontario surtax.
Do dividends affect my Old Age Security?
They can. The grossed-up amount, not the cash dividend, is included in your income, and the OAS recovery tax is based on your net income. A $1,000 eligible dividend adds $1,380 to your income, so it can push you toward the recovery threshold faster than $1,000 of interest would.
Do I get the dividend tax credit on US dividends?
No. Foreign dividends do not qualify for the Canadian dividend tax credit. You report them in Canadian dollars on line 12100, at the full amount before any foreign tax withheld, and you may be able to claim a foreign tax credit for the tax the other country withheld.
Do dividends count toward RRSP contribution room?
No. RRSP room is based on earned income, such as salary, net self-employment income and net rental income. Dividends and interest are not earned income, so an owner who pays themselves only dividends builds no new RRSP room. Paying some salary is one way to keep building room.
