An eligible dividend is a dividend paid by a Canadian corporation that has been designated as eligible and that qualifies, in the hands of an individual shareholder, for the enhanced dividend tax credit. The enhanced credit produces a lower personal tax rate than applies to ordinary, non-eligible dividends.
To pay an eligible dividend, the corporation generally must have a sufficient general rate income pool — an account that tracks income taxed at the general corporate rate rather than the small business rate — and must designate the dividend as eligible when it is paid. Eligible dividends typically flow from corporate income that did not benefit from the small business deduction, reflecting the integration principle that income taxed at the higher corporate rate carries a more generous credit on distribution.