Fixed and Non-Fixed dividends

A dividend is a share of a company’s profits that it pays to its owners. A “fixed” dividend comes from profits taxed at the standard rate and provides the owner with a more generous tax credit. A “non-fixed” dividend comes from profits taxed at the reduced small-business rate and results in higher taxes for the individual.

At a glance

Fixed: Derived from profits taxed at the company’s standard rate; the owner receives an enhanced tax credit (38% increase)
Undetermined: derived from profits that benefited from the reduced tax rate for small businesses (the SBD, or small business deduction); subject to a 15% surcharge
The company must “designate” the fixed dividend in writing at the time of payment
Both appear on the T5 form (the tax form that reports your dividends) and on the Relevé 3 in Quebec
The type of dividend paid depends on the tax rate the company has already paid on those profits (reduced rate or standard rate)

Why it matters

If you pay yourself dividends from your company, this distinction directly affects your personal tax bill. Example: Out of $10,000 received, a qualified dividend can cost you a few hundred dollars less in taxes than an unqualified dividend, because the company has already paid more tax on its end. This is the principle of “tax integration”: overall, the tax authorities aim to collect roughly the same amount, regardless of the method used. For a Quebec entrepreneur, the real challenge is striking the right balance between salary and dividends based on your cash flow needs, your RRSP (retirement savings plan), and your plans for the future. We recommend doing this exercise every year. Bankeo connects you for free with a vetted accountant or CPA to help with this calculation, and we’re here to support you every step of the way.

Where each type comes from: Undistributed dividends come from profits that have benefited from the small business deduction, the portion of profits taxed at the general rate. This distinction is part of the choice Salary or Dividend, and differs from the capital dividend account, which pays out tax-free money. Both types of dividends must be reported on the Canada Revenue Agency’s T5 form (source) and on Statement 3 in Quebec. To help you manage everything year after year, Bankeo provides you with a vetted accountant at no cost, and we’re here to support you every step of the way.

Frequently asked questions

What’s the difference, in simple terms?

A dividend is a share of a company’s profits that it pays to its owners. “Determined” or “undetermined” simply indicates the tax rate at which the company has already paid taxes on those profits. This, in turn, determines how much tax YOU pay on the dividend: a “determined” dividend costs you less, while an “undetermined” one costs you a little more.

Can an SME pay fixed dividends?

An SME (small or medium-sized business) can do this if it has a “general-rate income account” (CRTG), meaning profits that did not qualify for the reduced small-business tax rate. Many Quebec SMEs primarily pay undetermined dividends. The designation must be made in writing at the time of payment; otherwise, the dividend is treated as undetermined.

Salary or dividend: How to decide?

There’s no one-size-fits-all answer: a salary entitles you to RRSP (retirement savings plan) and QPP (the Quebec Pension Plan, your future public pension) benefits, while a dividend offers flexibility. The right balance depends on your situation. Bankeo connects you for free with a vetted accountant/CPA who performs this calculation every year for entrepreneurs like you, and we’re here to support you every step of the way; our salary vs. dividend calculator provides an initial overview.