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Dividend Tax Credit Non-Eligible Dividends

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Personal Tax -> Dividend tax credits -> Non-eligible Dividend Tax Credit

Non-Eligible (Small Business) Dividend Tax Credit (DTC)

Income Tax Act s. 82(1)(b)(i), s. 121(a)

Note:  The gross-up and dividend tax credit are applicable to individuals, not corporations.

Non-eligible dividends, also known as regular, ordinary, or small business dividends, are any dividends issued by a Canadian corporation, public or private, which are not eligible for the enhanced dividend tax credit.

The non-eligible dividend tax credit rate is used for dividends received by individuals from Canadian-controlled private corporations (CCPCs), to the extent that their income is subject to tax at the small business rate.  A portion of dividends from large public corporations may also be classified as not being eligible for the enhanced dividend tax credit and would therefore be classified as non-eligible dividends.

When an individual receives non-eligible dividends, the amount included in taxable income in 2018 is 116% of the actual dividend.  The additional 16% is referred to as the gross-up.  The gross-up is further reduced to 15% for 2019 and later years.

The Federal 2015 Budget announced that the Small Business Tax Rate and the non-eligible dividend tax credit would be revised starting in 2016, as per the following Table, which shows the dividend tax credit as a % of the taxable grossed-up dividend.  The Income Tax Act (ITA) s. 121 specifies a fraction which is to be multiplied by the gross-up percentage in order to determine the dividend tax credit.  The fraction is indicated in the table below.

Contrary to what was presented in the Liberal Platform, the Federal 2016 Budget left the small business tax rate, non-eligible dividend gross-up and tax credit at 2016 rates.  However, on October 16, 2017, the Department of Finance announced that the small business tax rate would be reduced to 10% effective January 1, 2018 , and to 9% effective January 1, 2019.

On October 24, 2017, in conjunction with their Fall Economic Statement, the Department of Finance tabled a Notice of Ways and Means Motion to reduce the gross-up rate for non-eligible dividends to 16% in 2018, and 15% thereafter, with the non-eligible dividend tax credit revised to 8/11ths of the gross-up for 2018 and to 9/13ths of the gross-up for 2019 and later years.

  Will not happen New Legislation
  2015 2016 2017 2018 2019+ 2018 2019+
Small business tax rate 11% 10.5% 10% 9.5% 9% 10% 9%
Non-eligible dividend gross-up  18% 17% 17% 16% 15% 16% 15%
ITA s. 121 fraction of gross-up 13/18 21/29 20/29 20/29 9/13 8/11 9/13
Non-eligible dividend tax credit 11.0169% 10.5217% 10% 9.5% 9% 10.0313% 9.0301%

Example of the non-eligible dividend tax credit calculation for 2016 and 2017:

Dividend received $100.00
Gross-up 17% 17.00
Taxable dividend $117.00
Dividend tax credit 21/29 x $17 $12.31
Tax credit as % of taxable dividend 10.5217%
Tax credit as % of actual dividend 12.31%

See Small Business Taxation on the 2016 Budget website.  See Small Business Tax Rate on the 2015 Budget website.

The Federal 2013 Budget indicated that the then-current dividend tax credit and gross-up factor for these dividends overcompensated individuals for income taxes presumed to have been paid at the corporate tax level on active business income.  For this reason, for dividends paid in 2014 and later years, the gross-up factor was reduced from 25% to 18%, and the tax credit was revised from 2/3 of the gross-up amount to 13/18 of the gross-up amount.  This reduced the federal  DTC rate from 13 1/3% of the grossed-up dividend to 11.017%, and from 16 2/3% of the actual dividend to 13% of the actual dividend.

For the maximum amounts of non-eligible dividends that can be earned federally and in each province before any federal taxes are payable, see the table in the article on alternative minimum tax.  Keep in mind that when dividends are paid out to shareholders, the company is using income on which corporate income tax has already been paid, because dividends are not a deductible expense.

Federal & Provincial/Territorial Non-Eligible (Small Business) Business Dividend Tax Credit Rates

Non-Eligible Dividend Tax Credit Rates as a % of Grossed-up Taxable Dividends

Year Gross-up

Federal

AB(9)

BC(11)  

MB(4) NB(5) NL(8) NS(10)

NT

NU

ON(7)

PE(3) QC(6)  SK(1) 

YT(2)

2018 16% 10.0313% 2.07% 2.07% 0.7835% 2.853% 3.5% 3.16% 6% 2.76% 3.1197% 2.90% 7.05% 3.196% 2.26%
2017 17% 10.5217% 2.19% 2.18% 0.7835% 3.245% 3.5% 3.33% 6% 2.91% 4.2863% 3.05% 7.05% 3.367% 3.14%
2016 17% 10.5217% 3.08% 2.47% 0.7835% 3.63% 3.5% 3.33% 6% 2.91% 4.2863% 3.05% 7.05% 3.367% 3.14%
2015 18% 11.0169% 3.1% 2.59% 0.83% 4.0% 4.1% 3.5% 6% 3.051% 4.5% 3.2% 7.05% 3.4% 3.17%
2014 18% 11.0169% 3.1% 2.59% 0.83% 5.3% 4.1% 5.873% 6% 3.051% 4.5% 3.2% 7.05% 3.4% 4.03%
2013 25% 13.3333% 3.5% 3.4% 1.75% 5.3% 5% 7.7% 6% 4% 4.5% 2.9% 8% 4% 4.51%
2012 25% 13.3333% 3.5% 3.4% 1.75% 5.3% 5% 7.7% 6% 4% 4.5% 1.0% 8% 4% 4.51%
2011 25% 13.3333% 3.5% 3.4% 1.75% 5.3% 5% 7.7% 6% 4% 4.5% 1.0% 8% 5% 4.51%
2010 25% 13.3333% 3.5% 3.4% 2.5% 5.3% 5% 7.7% 6% 4% 4.5% 2.1% 8% 6% 4.45%
2009 25% 13.3333% 3.5% 4.2% 2.5% 5.3% 5% 7.7% 6% 4% 4.5% 3.2% 8% 6% 4.45%
2008 25% 13.3333% 4.5% 5.1% 3.15% 5.3% 5% 7.7% 6% 4% 5.13% 4.3% 8% 6% 4.45%
2007 25% 13.3333% 5.5% 5.1% 3.67% 5.3% 5% 7.7% 6% 4% 5.13% 6.5% 8% 6% 4.45%

Non-Eligible Dividend Tax Credit Rates as a % of Actual Dividends

Year Gross-up

Federal

AB(9)

BC(11)  

MB(4) NB(5) NL(8) NS(10)

NT

NU

ON(7)

PE(3) QC(6)  SK(1) 

YT(2)

2018 16% 11.6348% 2.407% 2.40% 0.909% 3.309% 4.06% 3.67% 6.96% 3.2% 3.619% 3.364% 8.178% 3.708% 2.622%
2017 17% 12.3104% 2.557% 2.55% 0.917% 3.80% 4.095% 3.90% 7.02% 3.4% 5.015% 3.57% 8.249% 3.939% 3.678%
2016 17% 12.3104% 3.6071% 2.89% 0.917% 4.247% 4.095% 3.90% 7.02% 3.4% 5.015% 3.57% 8.249% 3.939% 3.678%
2015 18% 13% 3.66% 3.06% 0.98% 4.72% 4.84% 4.13% 7.08% 3.6% 5.31% 3.78% 8.319% 4.01% 3.74%
2014 18% 13% 3.66% 3.06% 0.98% 6.254% 4.84% 6.93% 7.08% 3.6% 5.31% 3.78% 8.319% 4.01% 4.755%
2013 25% 16.67% 4.38% 4.25% 2.19% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 3.63% 10% 5.00% 5.64%
2012 25% 16.67% 4.38% 4.25% 2.19% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 1.25% 10% 5.00% 5.64%
2011 25% 16.67% 4.38% 4.25% 2.19% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 1.25% 10% 6.25% 5.64%
2010 25% 16.67% 4.38% 4.25% 3.13% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 2.63% 10% 7.5% 5.56%
2009 25% 16.67% 4.38% 5.25% 3.13% 6.63% 6.25% 9.63% 7.5% 5% 5.63% 4.00% 10% 7.5% 5.56%
2008 25% 16.67% 5.63% 6.38% 3.94% 6.63% 6.25% 9.63% 7.5% 5% 6.41% 5.38% 10% 7.5% 5.56%
2007 25% 16.67% 6.88% 6.38% 4.59% 6.63% 6.25% 9.63% 7.5% 5% 6.41% 8.13% 10% 7.5% 5.56%

Provincial/Territorial Legislation for the Non-Eligible Dividend Tax Credit

In some provinces (AB, BC, NS, NU, ON, PE, and SK), the dividend tax credit is based on a % of the federal gross-up.  The change in the gross-up rate automatically changes these dividend tax credits as a % of the taxable and actual dividend.

In other provinces (MB, NB, NL, NT, and QC) the dividend tax credit  is based on a % of the taxable dividend.  The % of the taxable dividend does not change as a result of the change in the gross-up.

Yukon's calculation for the dividend tax credit includes the % gross-up in the calculation, as well as the small business corporate tax rate and highest personal income tax rate.  Thus, if any of these factors changes, the dividend tax credit automatically changes.  None of the provinces or other territories have this automatic calculation in their Income Tax Acts.

New Brunswick has already tabled legislation to revise their non-eligible dividend tax credit rates in conjunction with the change in the gross-up.  It is possible that other provinces may table legislation to change their rates, either later in 2017, or in their 2018 budgets.

Notes to the above table:

(1) See SK non-eligible dividend tax credit article.  the Saskatchewan 2016 Budget indicated that the tax credit would remain at 3.4% of the taxable dividend.  However, Bill 22, which received Royal Assent on June 30, 2016, revised the rate to 23.173% of the federal gross-up, resulting in a tax credit of 3.367% of the taxable dividend.
(2) YT rates are dependent on corporate income tax rates, highest personal income tax (PIT) rate and gross-up %.  Their 2015 Budget reduced the small business corporate income tax rate to 3% and increased the highest PIT rate to 15%, resulting in the change above.  The 2018 dividend tax credit will be revised based on the reduction in the small business corporate income tax rate effective July 1, 2017, as per the YT 2017 Budget.
(3) PEI dividend tax credit rate for 2013 revised, as per the PEI 2013 Budget.  Dividend tax credit rate for 2014 revised as per Bill 7.   The 2016 change is automatic based on change in gross-up %..
(4) MB 2016 Budget bill includes a revision for 2016 (years where the federal gross-up is 17%), from 0.83% to 0.7835% of the taxable dividend.
(5) NB dividend tax credit:  New Brunswick tabled Bill 23, An Act to Amend the New Brunswick Income Tax Act, on November 14, 2017 to revise the dividend tax credit rate for non-eligible dividends
(6) See Quebec non-eligible dividend tax credit information - they announced in 2015 that the non-eligible dividend tax credit rate would remain unchanged at 7.05% of the taxable dividend when the gross-up rate changes.
(7) The Ontario 2017 Fall Economic Statement announced that the Ontario dividend tax credit rate for non-eligible dividends would be reduced to 3.2863% as of January 1, 2018.  However, their Bill 177 legislative changes will only result in this rate if the gross-up remains at 17%.  The above rates reflect their revised legislation with the gross-up of 16%.  See Ontario non-eligible dividend tax credit information.
(8) The NL 2016 budget revised the non-eligible dividend tax credit from 4.1% to 3.5% of the taxable dividend, for dividends received on or after July 1, 2016.  See NL non-eligible dividend tax credit information.
(9) Alberta's Bill 15, Tax Statutes Amendment Act, 2017 was tabled in May 2017, and revised the dividend tax credit rate to 54/359ths of the gross-up amount.
(10) The Nova Scotia dividend tax credit rate for non-eligible dividends is defined as 22.94% of the federal gross-up, as revised by Bill No. 108 Financial Measures (2015) Act, although the NS 2015 budget had indicated the rate would be 3.5% of the taxable dividend. For 2014 and earlier years, it was 38.5% of the Federal gross-up.
(11) The BC September 2017 Budget confirmed the reduction of the BC non-eligible dividend tax credit rate effective for the 2017 taxation year, in relation to the reduction of the small business income tax rate from 2.5% to 2%.

The above 2018 amounts are based on rates known as of November 19, 2017.

See the following example of the calculation of the taxes payable on small business dividends for taxpayers in the lowest tax brackets:

Small business dividend tax credit using
Ontario tax rates for 2017
Tax
Bracket 1
Tax
Bracket 2
Combined federal + Ontario tax rate 20.05% 24.15%
 
Dividends eligible for small business DTC

$100.00

$100.00
Gross-up 17.00

17.00

Taxable dividend $117.00 $117.00
 
Federal + ON tax (at 20.05% & 24.15%) $23.46 $28.26
Less dividend tax credits:
Federal 10.5217% x $117 $12.31   $12.31  
Ontario 4.2863% x $117 5.01   5.01  
Total dividend tax credits   $17.32   $17.32
Tax payable on dividends $6.14 $10.94
 
Marginal tax rate 6.14% 10.94%

Revised: November 20, 2017

 

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