Maximize Your Income with Eligible vs. Ordinary Dividends in 2025

Not all dividends are created equal, and for owner-managers of small and medium-sized corporations, this distinction can make a big difference to your bottom line. Imagine this: you’ve worked hard to grow your business, and now it’s time to decide how to pay yourself and your shareholders. Should you opt for eligible dividends with their lower personal tax rates, or ordinary (non-eligible) dividends that take advantage of the small business tax rate? The answer isn’t always straightforward.

Over the years, changes in tax rates and corporate rules have reshaped traditional dividend planning strategies. What worked last year might not be the best choice this year. Staying informed and proactive is key to optimizing your tax efficiency and aligning your remuneration strategy with your financial goals.

In this blog, we’ll explore:

1. The tax mechanics of eligible vs. ordinary dividends and how they impact your finances.
2. The role of corporate tax rates and pools like GRIP (General Rate Income Pool) and LRIP (Low Rate Income Pool) in determining your dividend options.
3. Strategic planning tips to minimize your total tax burden and maximize your after-tax income.

With the right approach, you can ensure that every dollar earned in your business works as hard for you as you’ve worked for it. Let’s dive in!

 

What Are Eligible and Ordinary Dividends?

When it comes to paying yourself or your shareholders as a business owner, understanding the distinction between eligible dividends and ordinary (non-eligible) dividends is crucial. These two types of dividends are taxed differently at both the corporate and personal levels, reflecting the varying tax treatments applied to the income they are distributed from. Choosing the right type of dividend can significantly impact your overall tax liability.

 

Ordinary Dividends (Non-Eligible Dividends)

Definition and Purpose
Ordinary dividends, also known as non-eligible dividends, are distributed from income earned by a corporation that is taxed at the small business rate. This lower corporate tax rate is designed to support small businesses and applies to active business income up to $500,000 annually in Alberta.

Corporate Taxation

• Small Business Rate (2025): 11% in Alberta.
• For corporations that qualify for the small business deduction, this rate offers significant tax savings at the corporate level.

Personal Taxation
When received by shareholders, ordinary dividends are subject to a 15% gross-up to reflect the corporate tax already paid. However, the dividend tax credit for non-eligible dividends is smaller than for eligible dividends, resulting in higher personal tax rates.

Tax Rates for Ordinary Dividends in Alberta (2025):

• Low-income earners: 15.86%.
• High-income earners: 42.31%.

Example: Distribution of $100,000 Ordinary Dividends

Category	Amount ($)
Corporate Tax Paid	$11,000
Grossed-Up Dividend	$115,000
Personal Tax (at 30%)	$34,500
Dividend Tax Credit	$9,000
Net Personal Tax	$25,500

 

Who Should Use Ordinary Dividends?

• Small business owners looking to maximize the benefits of the lower corporate tax rate.
• Shareholders in lower personal tax brackets to minimize the impact of the higher personal tax rate on non-eligible dividends.

 

Eligible Dividends

Definition and Purpose
Eligible dividends are distributed from income earned by a corporation taxed at the general corporate tax rate. This higher tax rate applies to income above the $500,000 small business threshold or income not eligible for the small business deduction.

Corporate Taxation

• General Rate (2025): 23% in Alberta.
• Income taxed at this rate builds up a General Rate Income Pool (GRIP), which determines the amount available for eligible dividend distributions.

Personal Taxation
Eligible dividends receive a 38% gross-up and a larger dividend tax credit to offset the higher corporate tax paid, resulting in lower personal tax rates.

Tax Rates for Eligible Dividends in Alberta (2025):

• Low-income earners: 2.57%.
• High-income earners: 34.31%.

Example: Distribution of $100,000 Eligible Dividends

Category	Amount ($)
Corporate Tax Paid	$23,000
Grossed-Up Dividend	$138,000
Personal Tax (at 25%)	$34,500
Dividend Tax Credit	$16,500
Net Personal Tax	$18,000

 

 

Who Should Use Eligible Dividends?

• Corporations with income exceeding the small business deduction threshold.
• Shareholders in higher income brackets to take advantage of the lower effective tax rates on eligible dividends.

 

Why the Difference?

The difference between eligible and ordinary dividends stems from the underlying tax policy that governs corporate and personal taxation in Canada.

1. Corporate Taxation
   • Income taxed at the small business rate incurs a lower tax burden at the corporate level, which must be balanced by higher taxes at the personal level when distributed as dividends.
   • Income taxed at the general corporate rate incurs a higher tax burden upfront, resulting in lower taxes at the personal level when distributed as eligible dividends.
2. Integration System
   • Canada’s integration system is designed to ensure that income earned through a corporation is taxed similarly to income earned directly by individuals.
   • By grossing up dividends and providing tax credits, the system aims to eliminate double taxation and create fairness between corporate and personal income sources.

Key Consideration:
While integration seeks to balance the tax burden, shifts in tax rates and policy changes can create opportunities or challenges for business owners. This is why annual dividend planning is essential.

 

Planning Tips for Eligible and Ordinary Dividends

1. Monitor GRIP and LRIP Balances
   • Use Schedule 53 to track GRIP and ensure eligible dividends do not exceed available balances.
   • Use Schedule 54 to manage LRIP and avoid penalties for excessive eligible dividend designations.
2. Optimize Dividend Timing
   • Distribute dividends strategically to align with shareholders’ lower personal tax brackets.
3. Consider Annual Tax Changes
   • Policy shifts, such as adjustments to gross-up percentages or dividend tax credits, can alter the tax advantages of eligible vs. ordinary dividends.
4. Evaluate Total Tax Impact
   • Assess the combined corporate and personal tax burden to determine the most tax-efficient remuneration strategy.

Scenario	Corporate Tax	Personal Tax	Total Tax Burden
Salary	$0	$206,727	$206,727
Ordinary Dividend ($100,000)	$11,000	$25,500	$36,500
Eligible Dividend ($100,000)	$23,000	$18,000	$41,000

 

Conclusion

Understanding the differences between eligible and ordinary dividends is essential for business owners seeking to optimize their tax strategy. While eligible dividends often result in lower personal tax rates, ordinary dividends can provide significant corporate tax savings, particularly for small businesses.

At Shajani CPA, we specialize in helping family-owned enterprises navigate these decisions. By crafting tailored dividend plans, we ensure your tax strategy aligns with your financial goals and takes advantage of the latest tax rules.

 

Corporate Tax Rates and Dividend Distribution

When planning how to distribute corporate income to shareholders, understanding the interplay between corporate tax rates and dividend taxation is vital. Alberta’s tax system, with its distinct rates for small business income and general income, shapes the amount of after-tax income available for distribution as dividends and the type of dividend—eligible or ordinary—that can be paid.

 

Small Business Tax Rate

The small business tax rate in Alberta applies to active business income up to $500,000 annually for Canadian-Controlled Private Corporations (CCPCs). This preferential rate is designed to support small businesses by reducing the corporate tax burden on lower earnings.

• Small Business Tax Rate in Alberta (2025): 11%
• Example Calculation:
  • A corporation earning $500,000 in active business income at the small business rate pays:
    $500,000 \times 11\% = $55,000
  • After-tax income available for distribution as ordinary dividends:
    $500,000 – $55,000 = $445,000

Small Business Scenario	Amount ($)
Total Corporate Income	$500,000
Corporate Tax (11%)	$55,000
After-Tax Income for Distribution	$445,000

Impact on Dividend Type

• Income taxed at the small business rate must be distributed as ordinary (non-eligible) dividends.
• These dividends are grossed up by 15% for personal taxation, and shareholders receive a smaller dividend tax credit.

 

General Corporate Tax Rate

The general corporate tax rate in Alberta applies to income that exceeds the $500,000 small business deduction threshold or does not qualify for the small business deduction (e.g., investment income). This higher rate reflects the standard taxation applied to larger corporations or non-active business income.

• General Corporate Tax Rate in Alberta (2025): 23%
• Example Calculation:
  • A corporation earning $500,000 in active business income at the general corporate rate pays:
    $500,000 \times 23\% = $115,000
  • After-tax income available for distribution as eligible dividends:
    $500,000 – $115,000 = $385,000

General Corporate Scenario	Amount ($)
Total Corporate Income	$500,000
Corporate Tax (23%)	$115,000
After-Tax Income for Distribution	$385,000

Impact on Dividend Type

• Income taxed at the general rate is eligible for distribution as eligible dividends.
• These dividends are grossed up by 38% for personal taxation, and shareholders receive a larger dividend tax credit to offset the higher corporate tax paid upfront.

Impact on Tax Rates

Eligible Dividends:

• Taxed at lower personal rates due to the higher corporate tax paid upfront.
• Alberta personal tax rates for eligible dividends in 2025 range from 2.57% to 34.31%.

Ordinary Dividends (Non-Eligible):

• Taxed at higher personal rates due to the smaller dividend tax credit.
• Alberta personal tax rates for ordinary dividends in 2025 range from 15.86% to 42.31%.

 

Example Comparison: Small Business vs. General Tax Rates

Scenario	Corporate Tax ($)	After-Tax Income ($)	Gross-Up Factor	Taxable Income ($)	Personal Tax ($)	Total Tax ($)
Small Business Rate	$55,000	$445,000	1.15	$511,750	$169,902	$224,902
General Corporate Rate	$115,000	$385,000	1.38	$531,300	$152,170	$267,170

Key Insights:

• Eligible Dividends: Lower personal tax rates make them attractive for shareholders in higher income brackets. However, the higher corporate tax rate (23%) may increase the total tax burden.
• Ordinary Dividends: Lower corporate tax rates (11%) reduce the initial tax liability but increase the personal tax burden for shareholders, particularly those in higher income brackets.

 

Strategic Considerations

1. Choose Dividends Based on Corporate Income:
   • Use ordinary dividends for income taxed at the small business rate to leverage the lower corporate tax.
   • Reserve eligible dividends for income taxed at the general rate to optimize the lower personal tax rates on eligible dividends.
2. Monitor GRIP and LRIP Balances:
   • Ensure sufficient GRIP to designate eligible dividends.
   • Manage LRIP to comply with distribution rules and avoid penalties.
3. Evaluate Combined Tax Impact:
   • Assess both corporate and personal taxes to determine the most tax-efficient distribution strategy.
4. Plan Annually:
   • Changes to tax rates or corporate earnings thresholds may shift the advantages between eligible and ordinary dividends.

 

Conclusion

Understanding Alberta’s small business and general corporate tax rates is critical for business owners planning dividend distributions. By carefully aligning your corporate income with the appropriate dividend type, you can minimize your combined tax burden and maximize after-tax income.

At Shajani CPA, we provide tailored strategies to optimize your tax planning. Whether you’re distributing ordinary dividends, eligible dividends, or a combination of both, we help you make informed decisions that align with your financial goals.

 

GRIP and LRIP: Managing Dividend Pools

Understanding how to manage the General Rate Income Pool (GRIP) and Low Rate Income Pool (LRIP) is essential for optimizing dividend distributions. These pools ensure that income taxed at different corporate rates is properly allocated for either eligible or ordinary dividends, aligning with Canada’s integration system.

 

General Rate Income Pool (GRIP)

What is GRIP?
The General Rate Income Pool (GRIP) tracks after-tax corporate income that has been taxed at the general corporate tax rate (23% in Alberta for 2025). GRIP ensures that corporations distribute eligible dividends only from income that has already been taxed at the higher general rate.

Key Features of GRIP:

• Purpose: Supports the designation of eligible dividends, which benefit from a 38% gross-up and a larger dividend tax credit.
• Calculation: GRIP is calculated using Schedule 53 and must be monitored to ensure accurate dividend designations.
• Opening Balances: GRIP begins with the opening balance from the prior year and is adjusted based on current-year corporate income taxed at the general rate.

Example of GRIP Usage:
A corporation with $500,000 in income taxed at the general corporate rate creates a GRIP balance as follows:

• Income taxed at 23%:
  $500,000 \times (1 – 23\%) = $385,000
• After-tax income added to GRIP:
  $385,000

The corporation can distribute up to $385,000 as eligible dividends, maximizing the tax benefits for shareholders.

 

Low Rate Income Pool (LRIP)

What is LRIP?
The Low Rate Income Pool (LRIP) tracks after-tax corporate income that has been taxed at the small business rate (11% in Alberta for 2025). LRIP ensures that non-eligible dividends are distributed when income has been taxed at the lower corporate rate, maintaining fairness in the tax system.

Key Features of LRIP:

• Purpose: Ensures corporations distribute non-eligible dividends from income taxed at the small business rate, reflecting the smaller tax burden incurred at the corporate level.
• Calculation: LRIP is calculated using Schedule 54 and adjusted annually based on small business income and dividend distributions.
• Compliance: Proper management of LRIP avoids issues with excessive eligible dividend designations, which can result in penalties.

Example of LRIP Usage:
A corporation with $500,000 in income taxed at the small business rate creates an LRIP balance as follows:

• Income taxed at 11%:
  $500,000 \times (1 – 11\%) = $445,000
• After-tax income added to LRIP:
  $445,000

This balance determines the amount available for distribution as ordinary (non-eligible) dividends.

 

Managing GRIP and LRIP

Why is Managing GRIP and LRIP Important?
Accurate tracking and management of GRIP and LRIP are essential for ensuring the proper classification of dividend distributions. Mismanagement can lead to excessive eligible dividend designations or improper use of LRIP, resulting in penalties and inefficiencies.

Key Insight:

• GRIP balances must be carefully monitored to ensure eligible dividend designations do not exceed available balances.
• Part III.1 Tax Penalty: If a corporation designates excessive eligible dividends, it may be subject to Part III.1 tax, calculated using Schedule 55. This penalty imposes an additional tax burden on improperly designated dividends.

 

Practical Strategies for GRIP and LRIP Management

1. Monitor Balances Annually:
   • Use Schedule 53 to calculate and update GRIP balances.
   • Use Schedule 54 to track and adjust LRIP balances.
2. Avoid Excessive Eligible Dividend Designations:
   • Ensure GRIP balances are sufficient before declaring eligible dividends.
   • When in doubt, consult a CPA to verify compliance with GRIP and LRIP rules.
3. Plan Dividend Distributions Strategically:
   • Prioritize eligible dividends for high-income shareholders to take advantage of lower personal tax rates.
   • Distribute ordinary dividends to shareholders in lower tax brackets to minimize combined corporate and personal tax burdens.
4. Integrate GRIP and LRIP into Annual Planning:
   • Align dividend strategies with annual corporate income and tax planning goals.
   • Review GRIP and LRIP balances during year-end tax planning sessions to optimize distributions.

 

Example Comparison: GRIP vs. LRIP Dividend Distributions

Scenario	Corporate Tax Rate	After-Tax Income	Dividend Type	Gross-Up	Taxable Income	Personal Tax	Total Tax Burden
GRIP (Eligible Dividend)	23%	$385,000	Eligible	38%	$531,300	$152,170	$267,170
LRIP (Ordinary Dividend)	11%	$445,000	Non-Eligible	15%	$511,750	$169,902	$224,902

Insights:

• Eligible dividends result in lower personal tax rates but a higher total tax burden due to the general corporate tax rate.
• Ordinary dividends have a lower combined tax burden, leveraging the small business tax rate, but are taxed more heavily at the personal level.

 

Conclusion

Effectively managing GRIP and LRIP is essential for ensuring tax-efficient dividend distributions. Proper tracking through Schedule 53 and Schedule 54 helps corporations maximize the benefits of eligible and ordinary dividends while avoiding penalties under Part III.1 tax.

At Shajani CPA, we specialize in helping business owners navigate the complexities of GRIP and LRIP management. Whether you’re optimizing dividend strategies or ensuring compliance, our expertise ensures your financial goals are met efficiently.

 

Comparing Eligible and Ordinary Dividends

When distributing $100,000 of corporate income, the choice between eligible dividends and ordinary (non-eligible) dividends significantly impacts the total tax burden. While eligible dividends enjoy lower personal tax rates, they come with a higher corporate tax rate. Conversely, ordinary dividends benefit from a lower corporate tax rate but face higher personal tax rates. Below is a breakdown of the tax implications for both scenarios:

 

Eligible Dividends

Corporate Taxation
Eligible dividends are distributed from income taxed at the general corporate tax rate of 23% (Alberta, 2025). This rate applies to income that exceeds the small business deduction limit or is otherwise ineligible for the small business rate.

• Corporate Tax Paid:
  $100,000 \times 23\% = $23,000
• After-Tax Income for Distribution:
  $100,000 – $23,000 = $77,000

Personal Taxation
Eligible dividends are grossed up by 38% to account for the corporate tax already paid. This creates a taxable income of:
$77,000 \times 1.38 = $106,260

Using Alberta’s 2025 personal tax brackets, the estimated personal tax liability for $106,260, after applying the eligible dividend tax credit, is approximately $25,000.

Total Tax Burden:

• Corporate Tax: $23,000
• Personal Tax: $25,000
• Total: $48,000

 

Ordinary Dividends

Corporate Taxation
Ordinary dividends are distributed from income taxed at the small business rate of 11% (Alberta, 2025). This rate applies to the first $500,000 of active business income for Canadian-Controlled Private Corporations (CCPCs).

• Corporate Tax Paid:
  $100,000 \times 11\% = $11,000
• After-Tax Income for Distribution:
  $100,000 – $11,000 = $89,000

Personal Taxation
Ordinary dividends are grossed up by 15%, creating a taxable income of:
$89,000 \times 1.15 = $102,350

Using Alberta’s 2025 personal tax brackets, the estimated personal tax liability for $102,350, after applying the non-eligible dividend tax credit, is approximately $35,000.

Total Tax Burden:

• Corporate Tax: $11,000
• Personal Tax: $35,000
• Total: $46,000

 

Comparison Table

Scenario	Corporate Tax ($)	Personal Tax ($)	Total Tax Burden ($)
Eligible Dividend	$23,000	$25,000	$48,000
Ordinary Dividend	$11,000	$35,000	$46,000

 

Analysis

1. Eligible Dividends
   • Benefit from lower personal tax rates due to the higher dividend tax credit.
   • The higher corporate tax rate (23%) offsets some of the personal tax savings.
   • Best suited for shareholders in higher personal tax brackets, as the lower effective tax rate on eligible dividends minimizes the overall tax impact.
2. Ordinary Dividends
   • Benefit from a lower corporate tax rate (11%), leaving more after-tax income for distribution.
   • Higher personal tax rates due to the smaller dividend tax credit.
   • Often advantageous for shareholders in lower income brackets, as the higher personal tax rate has less impact.

Conclusion:
While ordinary dividends result in a slightly lower total tax burden in this scenario, the best option depends on the shareholder’s personal tax bracket, corporate earnings, and long-term financial goals. Strategic planning with a CPA ensures optimal outcomes tailored to your unique situation.

 

Strategic Tax Planning Tips for Dividends

Effective tax planning for dividends involves understanding the interplay between corporate pools, personal tax brackets, and legislative changes. By strategically managing your dividend distributions, you can minimize your tax burden while aligning with your financial goals. Here are key strategies to optimize your dividend planning.

 

1. Monitor GRIP and LRIP Balances

General Rate Income Pool (GRIP):

• GRIP tracks corporate income taxed at the general corporate tax rate (23% in Alberta for 2025). It determines the amount of income eligible for distribution as eligible dividends.
• Why It Matters: Declaring eligible dividends without sufficient GRIP can trigger penalties under Part III.1 tax, which adds an additional tax burden on excessive eligible dividend designations.

Low Rate Income Pool (LRIP):

• LRIP tracks income taxed at the small business rate (11% in Alberta for 2025). It ensures that income taxed at this lower rate is distributed as ordinary dividends.
• Strategic Planning:
  • Use LRIP to manage ordinary dividend distributions and avoid misclassifications.
  • Balance LRIP and GRIP to optimize overall tax efficiency.

Actionable Tips:

• Use Schedule 53 to track GRIP balances annually.
• Use Schedule 54 to calculate LRIP accurately and plan non-eligible dividends.

 

2. Adjust Dividend Timing

Timing is critical when planning dividend distributions. By aligning dividends with lower personal tax brackets or deferring distributions to future years, you can optimize tax outcomes.

Defer Dividends to Lower Tax Brackets:

• Distribute dividends in years when shareholders are in lower income brackets to minimize personal tax liability.
• Example: If a shareholder expects lower income in a future year due to reduced corporate activity or personal circumstances, deferring dividends can result in significant tax savings.

Consider the Impact of Passive Income Rules:

• Passive income exceeding $50,000 in a CCPC can reduce access to the small business deduction, increasing the effective tax rate.
• Strategic dividend distributions can mitigate this impact by ensuring retained earnings do not generate excessive passive income.

Actionable Tips:

• Align dividend payments with shareholder cash flow needs and tax planning opportunities.
• Work with a CPA to project income and assess the tax impact of deferred or accelerated dividend payments.

 

3. Revisit Annually

Tax planning is not a one-time activity. Legislative changes, shifts in corporate earnings, and personal circumstances can alter the tax advantages of eligible versus ordinary dividends.

Tax Rate Changes:

• Government policies often adjust corporate and personal tax rates, impacting the relative benefits of eligible and ordinary dividends.
• Example: Changes to the gross-up percentage or dividend tax credit for either type of dividend can shift the overall tax burden.

Corporate Earnings:

• Variations in corporate income levels can affect GRIP and LRIP balances, influencing the type and amount of dividends that can be distributed.

Benefits of Annual Reviews:

• Regular reviews with a CPA ensure your strategy remains aligned with current tax laws and financial goals.
• Proactive adjustments can prevent penalties and maximize tax efficiency.

Actionable Tips:

• Schedule an annual dividend review with your CPA.
• Use updated financial projections and tax rate changes to refine your strategy.

 

Example Scenario: Strategic Tax Planning in Action

Scenario	Strategy	Result
GRIP Balance Utilization	Monitor GRIP and plan eligible dividends	Avoid excessive eligible dividend penalties
Timing Dividends	Defer dividends to a low-income year	Reduced personal tax liability
Annual Review	Adjust dividends for new tax rates	Maintain optimal tax efficiency

 

Conclusion

Strategic dividend planning requires a detailed understanding of GRIP, LRIP, and the timing of distributions. By proactively managing these elements and revisiting your strategy annually, you can reduce your combined corporate and personal tax burden while maximizing after-tax income.

At Shajani CPA, we specialize in helping business owners navigate these complexities. From tracking GRIP and LRIP balances to aligning dividend timing with your financial goals, we provide expert guidance to ensure your plan is both compliant and efficient.

 

Conclusion

Choosing between eligible and ordinary dividends is not merely a decision about tax rates—it’s a comprehensive strategy that integrates corporate and personal tax planning. The goal is to achieve the lowest combined tax burden while aligning with your broader financial objectives. With ever-evolving tax rules and rates, having a tailored dividend strategy is critical for maximizing your after-tax income and ensuring compliance.

At Shajani CPA, we understand the complexities of dividend planning, particularly for family-owned businesses. From effectively managing GRIP and LRIP balances to strategically timing and optimizing dividend distributions, our team provides proactive, expert guidance. We help you navigate these decisions with clarity, ensuring that your tax strategy not only minimizes liabilities but also supports your long-term financial goals.

Let Shajani CPA help you craft a dividend plan that ensures financial security and tax efficiency. Tell us your ambitions, and we will guide you there.

 

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2025 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

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