An eligible dividend is a dividend paid from corporate income that was taxed at the general rate, carrying a higher gross-up and a larger dividend tax credit for the shareholder.
When a corporation pays a dividend out of income taxed at the general corporate rate (rather than the low small business rate), it can designate it an eligible dividend. Because more corporate tax was paid on that income, the shareholder gets a larger dividend tax credit, and the effective personal rate is lower than on a non-eligible dividend.
A corporation tracks its capacity to pay eligible dividends in its General Rate Income Pool (GRIP). Designating dividends correctly, and not over-designating, matters: an excessive eligible dividend designation can trigger a penalty tax.
A corporation earned income above the small business limit, taxed at the general rate, and built up GRIP. It designates a $20,000 dividend as eligible, giving the owner a lower personal tax rate than a non-eligible dividend would.
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