Dividends themselves can be either eligible or non-eligible. An eligible dividend is subject to a 38% gross-up. The dividend is generated by the active business income of a Canadian controlled private corporation, which isn’t eligible for the small business deduction, and dividends from other Canadian public and private corporations resident in Canada that are subject to the general corporate income tax rate (27% in Alberta). Non-eligible dividends are subject to a 17% gross-up and are generally dividends from the active business income of a Canadian controlled private corporation that is eligible for the small business deduction and dividends from investment income of Canadian controlled private corporation.
The mechanics behind the distribution of dividends are technical, but they should nevertheless be mentioned.
A Canadian controlled private corporation is required to keep track of its “general rate income pool” (GRIP). GRIP is essentially income that has been taxed at the high corporate tax rate (27% in Alberta). The assumption is that anything else earned by a Canadian controlled private corporation is taxed at a low rate, which feeds into its “low rate income pool” (LRIP). LRIP is essentially income of a non-Canadian controlled private corporation that has been subject to tax at the low tax rate (13.5% in Alberta). A Canadian controlled private corporation can pay an eligible dividend to the extent it has GRIP, and a non-eligible dividend to the extent it has LRIP.
In Alberta, for example, the personal tax on eligible dividends is about 31%, and for non-eligible dividends it is approximately 40%. Designation of an eligible dividend is at the discretion of the corporation. However, a non-Canadian controlled private positive LRIP balance cannot designate any of its dividends as eligible until the LRIP balance is exhausted.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.