Dividends From a Corporation
How to declare and pay a dividend, eligible vs non-eligible vs capital dividends, personal tax in Ontario, T5 slips and the solvency test.
The short version
- A dividend is a distribution of a corporation's after-tax profit to its shareholders. The directors declare it by resolution, and it must follow the rights attached to each class of shares.
- Dividends from small business income are "non-eligible" (15% gross-up). Dividends from income taxed at the general rate can be designated "eligible" (38% gross-up, bigger tax credit).
- The corporation reports every taxable dividend on a T5 slip and T5 Summary, due by the last day of February after the calendar year it was paid.
- A corporation can't legally pay a dividend if it would leave it unable to pay its debts. Directors who approve one anyway can be personally liable.
- Capital dividends, paid from the tax-free half of capital gains and some life insurance proceeds, are tax-free to the shareholder if the corporation files the election first.
Paying Dividends From a Corporation
Paying yourself a dividend sounds like the easy part of owning a corporation. Money in the company, owner wants money, done. In practice a dividend has a legal side (a resolution, the share rights, a solvency test), a tax side (eligible or not, the slip, the gross-up) and a timing side (calendar year, not your fiscal year). Miss one and you get a mess that looks like a shareholder loan or a surprise tax bill. Here's the whole thing, start to finish.
How to Pay a Dividend
- Check the numbers. Enough retained earnings, enough cash, and the company can still pay its bills afterwards.
- Directors' resolution. Declares the dividend, the class of shares, the amount per share, the record date and the payment date. Put it in the minute book.
- Decide the type: non-eligible, eligible (designated in writing when paid), or capital dividend (election filed first).
- Pay it, or credit it to the shareholder loan account.
- Report it: T5 slip to each shareholder and T5 Summary to CRA by the last day of February; dividends paid also go on the corporation's T2 (Schedule 3).
A dividend declared on December 15 and paid on January 10 is taxed in the year it's paid, not declared. Calendar years govern the slip, whatever the corporation's year-end.
Planning a dividend this year?
Enter your corporation's retained earnings, the dividend, your other income and province. The assistant tells you which type it can be, your personal tax on it, and the paperwork and deadlines.
Eligible, Non-Eligible and Capital Dividends
| Non-eligible | Eligible | Capital dividend | |
|---|---|---|---|
| Paid from | Income taxed at the small business rate | Income taxed at the general rate (tracked in the GRIP account for CCPCs), or eligible dividends received | Capital dividend account: tax-free half of capital gains, some life insurance proceeds |
| Gross-up | 15% | 38% | None |
| Federal dividend tax credit | 9.0301% of grossed-up amount | 15.0198% | None needed |
| Ontario dividend tax credit (2026) | 2.9863% (1.9863% from 2027) | 10% | None needed |
| Personal tax | Yes | Yes, lower | None |
| Paperwork | T5 | T5, and designation when paid | Form T2054 election filed by the earlier of the payment date and the date it becomes payable |
Over-designate eligible dividends beyond the corporation's GRIP and the corporation pays a 20% Part III.1 tax on the excess. Pay a capital dividend larger than the capital dividend account and it's a 60% Part III tax. Both can usually be fixed by election, but nobody enjoys the letter.
Personal Tax on Dividends, Ontario, 2026
Dividend income only, no other income, basic credits only:
| Dividends received | Tax on non-eligible | Tax on eligible |
|---|---|---|
| $50,000 | about $1,830 | about $600 |
| $100,000 | about $12,730 | about $3,360 |
| $150,000 | about $31,020 | about $16,460 |
| $250,000 | about $74,680 | about $53,690 |
| Top marginal rate | 47.74% | 39.34% |
At lower incomes much of the eligible column is the Ontario Health Premium, not income tax. Dividends look cheap because the corporation already paid its share. Add the corporate tax back and the total ends up close to salary; the comparison is on salary vs dividends. Remember the grossed-up amount is what counts as your net income, which matters for the Canada child benefit and the OAS clawback; see the T5 slip.
The Legal Side
- Solvency test. Under the Ontario and federal corporate statutes, a dividend can't be paid if there are reasonable grounds to believe the corporation couldn't pay its liabilities as they come due afterwards, or its assets would be worth less than its liabilities plus stated capital.
- Share rights. Dividends follow the articles. If two classes rank equally, you can't pay one and skip the other unless the articles allow discretionary dividends.
- Family shareholders. Dividends to a spouse, adult children or a family trust are often caught by the tax on split income; see paying your spouse and paying your children.
- Holding companies. Dividends to a connected Holdco are usually tax-free; see holding companies.
T5 Slips and Deadlines
File the T5 slips and T5 Summary by the last day of February. More than five T5 slips must be filed electronically. Late slips attract penalties that start at $100 and grow with the number of slips. A shareholder who doesn't live in Canada gets an NR4 instead, with non-resident tax withheld. Every corporate date is on corporate tax deadlines.
Mistakes We See
- Cash taken out with no resolution, "called a dividend" at year-end. Paper it when it happens.
- Calling everything eligible. A small business corporation usually has little or no GRIP.
- No T5. CRA matches T5s to personal returns. An unreported dividend is unreported income.
- Paying dividends from an insolvent company just before it closes. Directors can be on the hook; see closing a corporation.
The overview of corporations is on Canadian corporate tax explained.
Dividend Questions
How do I pay myself a dividend from my corporation?
The directors pass a resolution declaring the dividend, the corporation pays it or credits it to your shareholder account, and it issues you a T5 slip by the last day of February after the calendar year it was paid.
What is the difference between eligible and non-eligible dividends?
Eligible dividends come from income taxed at the general corporate rate and get a 38% gross-up and a larger tax credit. Non-eligible dividends come from income taxed at the small business rate and get a 15% gross-up and a smaller credit.
When is a dividend taxed?
In the calendar year it is paid, regardless of when it was declared or the corporation’s year-end.
Can my corporation pay a dividend if it has a loss this year?
Possibly, if it has retained earnings from earlier years and passes the solvency test. A dividend cannot be paid if it would leave the corporation unable to pay its debts.
What is a capital dividend?
A tax-free dividend paid from the capital dividend account, which includes the non-taxable half of capital gains and certain life insurance proceeds. The corporation must file Form T2054 before the dividend is paid or payable.
Sources: CRA, Completing the T5 slip; T5 Guide; Ontario, Ontario dividend tax credit. Checked October 2026. Personal tax figures come from our 2026 Ontario rules engine and include the Ontario Health Premium. The solvency test is summarized from the Ontario Business Corporations Act and the Canada Business Corporations Act. Part III and Part III.1 tax rates and the T2054 timing are as we understand the Income Tax Act; late-filing penalty amounts for slips vary with the number of slips.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.