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Estates & Wills & Trusts, Tax

Dividend tax insights

By Dennis Nerland

Dividends themselves can be either eligible or non-eligible. An eligible dividend is subject to a 38 per cent 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 per cent in Alberta).

Non-eligible dividends are subject to a 17 per cent 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 a 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 per cent 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 per cent 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 per cent, and for non-eligible dividends, it is approximately 40 per cent. 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.

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