Taking a dividend from a corporation is a multi-step process. The transfer of money to a personal account should be the result of that process, not a substitute for it. Before a dividend is paid or credited, the corporation should declare it through a board resolution, determine whether it is eligible or non-eligible, and create the documentation that supports the T5 slip issued to the shareholder. If cash has already moved during the year, it should be treated as a shareholder advance or loan until a dividend is properly declared and applied against it. Each step has tax consequences.
What a dividend declaration is
A dividend is usually a distribution of after-tax corporate earnings to shareholders. Declaring a dividend is a formal act by the board of directors, and corporate law also requires attention to the corporation’s solvency before the dividend is declared or paid. A federal corporation, for example, cannot declare or pay a dividend if there are reasonable grounds to believe it would be unable to pay its liabilities as they become due or that the realizable value of its assets would fall below its liabilities plus stated capital.
The declaration creates a legal obligation from the corporation to its shareholders. The resolution or written declaration states:
- the date of declaration
- the amount per share
- the class of shares on which the dividend is paid
- the payment, credit, or set-off date if different from the declaration date
- whether the dividend is designated as eligible
Without documentation, a payment described as a dividend may instead be treated as a shareholder benefit or shareholder debt under section 15 of the Income Tax Act, rather than as dividend income with the gross-up and dividend tax credit mechanism.
Eligible vs. non-eligible dividends
Not all dividends carry the same personal tax treatment. The distinction between eligible and non-eligible dividends affects the gross-up and dividend tax credit applied on the shareholder’s T1 return.
Non-eligible dividends are typically paid from income taxed at the small business rate inside the corporation, or from other income that does not support an eligible dividend designation. For most incorporated IT contractors, active business income within the small business deduction limit is taxed at approximately 12.2% combined federal and provincial in Ontario, based on the 9% federal small-business rate and 3.2% Ontario lower rate listed in CRA’s corporation tax rates. Distributions from that pool are non-eligible. The T1 gross-up for non-eligible dividends is 15%, and the federal dividend tax credit is 9/13ths of the gross-up amount.
Eligible dividends are paid from income taxed at the general corporate rate, not the small business rate. For income above the SBD limit, or income not eligible for the SBD, eligible dividend treatment may apply. The T1 gross-up for eligible dividends is 38%, and the federal dividend tax credit is 6/11ths of the gross-up amount. The higher gross-up and credit combination reflects the higher corporate tax already paid on that income.
The corporation must formally designate a dividend as eligible by notifying the recipient in writing at the time the dividend is paid. For a private corporation, the designation should be reflected in the dividend resolution and match the T5 slip. A late eligible-dividend designation is possible only in limited circumstances with CRA discretion, so it should not be treated as a normal clean-up step.
For most IT contractor corporations operating below the SBD limit, dividends will be non-eligible. The eligible dividend question becomes relevant if corporate income has exceeded the SBD limit in the year, if income has been subject to the passive income grind, or if the corporation holds income taxed at the general rate for other reasons.
For a CCPC, eligible dividend capacity is tracked through the General Rate Income Pool (GRIP). The Low Rate Income Pool (LRIP) is mainly relevant for corporations that are not CCPCs, rather than being the ordinary “non-eligible dividend pool” for a small contractor corporation. A CPA reviewing the T2 can confirm the available GRIP balance before a dividend is designated as eligible.
The T5 slip
The T5 Return of Investment Income slip reports dividends paid to individual shareholders. The corporation is responsible for preparing and distributing T5 slips and for filing the T5 Summary with CRA. CRA does not require a T5 slip for amounts paid to one recipient when the total amount for the year is less than $50, but that exception rarely matters for owner-manager dividend planning.
The T5 slip contains the following key boxes for dividends:
- Box 10: actual amount of dividends other than eligible dividends
- Box 11: taxable amount of dividends other than eligible dividends (actual × 1.15)
- Box 12: dividend tax credit for dividends other than eligible dividends
- Box 24: actual amount of eligible dividends
- Box 25: taxable amount of eligible dividends (actual × 1.38)
- Box 26: dividend tax credit for eligible dividends
The shareholder reports the taxable amount on their T1 personal return and applies the corresponding dividend tax credit as a non-refundable credit. The gross-up increases reported income before the credit is applied. The mechanism is designed to reflect the corporate tax already paid on the income before distribution.
The deadline for preparing and distributing T5 slips to shareholders, and for filing the T5 Summary with CRA, is the last day of February in the year following the calendar year in which the dividends were paid or credited. CRA treats a T5 information return as filed on time if the deadline falls on a Saturday, Sunday, or CRA-recognized public holiday and the return is received or postmarked by the next business day. A corporation with a fiscal year-end of October 31, 2025, that pays a dividend in November 2025, reports that dividend for the 2025 calendar-year T5 cycle. The T5 deadline follows the calendar year of payment or credit, not the corporate fiscal year-end.
CRA’s guide to the T5 Return of Investment Income covers the preparation and filing requirements.
Dividends and the shareholder loan
Many incorporated contractors draw personal amounts from the corporation during the year: paying personal expenses from the corporate account, taking cash advances, or having the corporation cover personal bills directly. These amounts accumulate in the shareholder loan account as money owed by the shareholder to the corporation.
A shareholder loan balance where the shareholder owes the corporation must generally be repaid or included in the shareholder’s personal income under section 15(2). The repayment exception generally requires repayment within one year after the end of the lender or creditor corporation’s taxation year in which the loan was made or the indebtedness arose, and the repayment cannot be part of a series of loans or other transactions and repayments.
Declaring a dividend is one way to clear a shareholder loan balance. If the corporation declares a dividend equal to the amount owed and the shareholder applies it against the loan rather than receiving cash, the resulting offset clears the balance. The dividend is still reportable income on the T1, and a T5 slip is generally required for ordinary owner-manager dividend amounts. Declaring a dividend does not eliminate the personal tax on the distribution; it changes the character of the amount from a shareholder advance to a dividend.
This is distinct from a management fee or bonus, which are also used to clear shareholder loan balances in some circumstances. The choice affects payroll obligations, CPP contributions, and the deductibility of the payment at the corporate level. The shareholder loan article covers these interactions in more detail.
Timing the declaration
Dividend declarations are more flexible in timing than salary. Salary accrued for deduction in a fiscal year must be paid or recorded as a payable before the corporation’s fiscal year-end. Dividends are paid from after-tax corporate income, so the timing question is different: when does the corporation have enough retained earnings and solvency support for the distribution, and when is the personal tax impact most manageable?
A dividend paid, credited, or made payable before December 31 lands on the shareholder’s T1 for that calendar year. A dividend paid, credited, or made payable in January of the following year lands on the next year’s T1. For contractors managing personal income across two calendar years, the timing of a dividend can shift the personal tax impact. This is particularly relevant in years when other personal income is variable or when a large consulting income year is followed by a lower one.
The decision involves the corporate cash position, the shareholder loan balance, the GRIP account balance if eligible dividends are being considered, and the broader compensation planning discussion that also covers salary, RRSP contribution room, and CPP. The dividend declaration is one element in a connected set of year-end decisions.
What the corporate record needs
Beyond the T5 slip, a dividend declaration requires the following to be in place:
- a signed resolution by the board of directors (or by the sole director, for a single-director corporation)
- the resolution date, per-share amount, class of shares, and eligible vs. non-eligible designation
- an entry in the corporate general ledger recording the dividend payable, cash payment, or shareholder-loan set-off, with the corresponding debit to retained earnings
- the T5 slip issued to the shareholder by the last day of February of the following calendar year, where a T5 slip is required
- the T5 Summary filed with CRA by the same deadline, where a T5 return is required
For incorporated IT contractors who are the sole director and sole shareholder, the resolution is a document signed in their capacity as a director. The process is brief, but the documentation must exist. An undocumented transfer that is later described as a dividend may remain a shareholder advance or loan until it is properly cleared.
What to review with a CPA
A CPA reviewing the dividend plan for a year will typically need:
- the corporation’s net income for the fiscal year and projected retained earnings
- whether any passive income is included in that income
- salary and dividends already paid in the year
- the shareholder loan balance and how it was created
- available RRSP contribution room from the shareholder’s current Notice of Assessment
- any mortgage or lending applications pending or anticipated in the next one to two years
- the shareholder’s total personal income from all sources for the calendar year of the dividend
The T2, T5, and T1 connect directly at the dividend level. The amount paid or credited, the eligible vs. non-eligible designation, and the calendar year of payment all need to line up across the corporate records and personal reporting. Working through the dividend decision alongside the year-end corporate review, before the fiscal year closes, gives the best opportunity to align the corporate and personal tax positions before options narrow.
For the interaction between salary and dividends in the annual compensation decision, the salary vs. dividend guide covers both options in detail. The year-end corporate tax planning guide explains how the compensation decision fits into the broader T2 review.