Which statement describes eligible dividends and non-eligible dividends for tax purposes?

Which statement describes eligible dividends and non-eligible dividends for tax purposes?

• A. Eligible dividends come from higher‑tax corporations and receive a larger dividend tax credit
• B. Non-eligible dividends receive a larger tax credit
• C. There is no difference for tax purposes
• D. Eligible dividends have a smaller gross-up and smaller tax credit

Answer: (A)

Dividends are taxed with two separate adjustments to reflect corporate taxes already paid. Eligible dividends come from corporations taxed at the higher general corporate rate, so they receive a larger gross‑up and a larger dividend tax credit, which lowers the investor’s net tax. Non-eligible dividends come from corporations taxed at a lower rate on investment income, with a smaller gross‑up and a smaller tax credit. This is why the statement describing eligible dividends as arising from higher‑tax corporations and receiving a larger dividend tax credit is the best fit. The other options contradict how the tax credits and gross‑ups differ between eligible and non‑eligible dividends.

Dividends are taxed with two separate adjustments to reflect corporate taxes already paid. Eligible dividends come from corporations taxed at the higher general corporate rate, so they receive a larger gross‑up and a larger dividend tax credit, which lowers the investor’s net tax. Non-eligible dividends come from corporations taxed at a lower rate on investment income, with a smaller gross‑up and a smaller tax credit. This is why the statement describing eligible dividends as arising from higher‑tax corporations and receiving a larger dividend tax credit is the best fit. The other options contradict how the tax credits and gross‑ups differ between eligible and non‑eligible dividends.