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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 eligible 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 being non-eligible dividends.
The amount included in taxable income for non-eligible dividends in 2019 and later years is 115% of the actual dividend. The additional 15% is referred to as the gross-up.
Timing of Inclusion in Income
The dividend is included in the recipient's income when it is paid by the corporation, not when it is declared.
Non-Eligible Dividends - a Bit of History
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.
Example of the federal non-eligible dividend tax credit calculation for 2019 and 2020:
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.
Maximum Dividends Before Federal Tax Payable
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
The only change thus far for 2023 is for Saskatchewan, which will also increase in 2024 and 2025. The rate increase for 2022 for SK was delayed for 1 year, as announced in November 2022.
Rates are as known at January 31, 2023.
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.
Notes to the above table of non-eligible dividend tax credit rates:
(1) See SK non-eligible dividend tax credits re increases for 2023 and 2024.
(2) YT rates are dependent on corporate income tax rates, highest personal income tax (PIT) rate and gross-up %. Their 2020 Budget reduced the small business corporate income tax rate to zero%, resulting in the change above for 2021.
(3) See PE non-eligible dividend tax credits.
(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. MB Bill 34, The Budget Implementation and Tax Statutes Amendment Act, 2018, revised the Income Tax Act so that the non-eligible dividend tax credit rate is 0.7835% when the federal gross-up rate is 17% or lower
(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 credits.
(7) The Ontario 2018 and 2019 marginal tax rates for non-eligible dividends reflect the changes in the non-eligible dividend tax credit rate included in Bill 57, Restoring Trust, Transparency and Accountability Act, 2018, tabled November 15, 2018 re the Ontario 2018 Fall Economic Statement. The 2020 rate is as per Bill 138 tabled for the 2019 Fall Economic Update. See Ontario non-eligible dividend tax credit information.
(8) 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. The 2018 rate was announced on December 19, 2018, with no mention of the 2019 rate. No legislation has yet been tabled for this change. The 2019 rate is as per Bill 10 which was tabled in June 2019 and received Royal Assent June 28, 2019. See AB non-eligible dividend tax credit information.
(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%.
See the following example of the calculation of the taxes payable on small business dividends for taxpayers in the lowest tax brackets:
Revised: January 31, 2023
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