A new tax was released decades ago to balance the playing field for investors who were being taxed twice on dividends. The Department Of Finance used this new legislation generally on corporations. The purpose was to lower the taxes paid by the stockholders while keeping the amount paid by the corporations at the same level to encourage investment. The process is done by “grossing up” the dividend before calculating the tax, and then rebating the tax paid when the stockholder files their own T1. Any income that the corporation earns is distributed as a dividend. This process is generally how income trusts are processed. Not imposing a new tax was agreed on by all the capital markets. Instead, lowing the tax rate on eligible dividends was the better choice.
When corporations want to pay its shareholder dividends that are eligible with the lower rate income tax, they refer to the draft legislation. Corporation who use the higher rate should not refer to the draft legislation. There are two tax rules from the new legislation. General rate income pool also known a GRIP and low rate income pool or LRIP. Both pools sound the same, but each one has different functions. The good pool is GRIP because eligible dividends are paid from a CCPC without tax implications. The bad pool is LRIP because the eligible dividend paid from corporations and non CCPC are limited until they are disturbed to various shareholders.
GRIP takes 68 percent of CCPC income, but only the income that is not subject to SBD or dividends from other businesses. This is considered a high rate tax business income tax.
The balance available in only non CCPC and corporations is the LRIP. To avoid major issues, corporations or non CCPC must pay their ineligible dividends before paying dividends that are eligible.
When a corporation designates a dividend as eligible, they must put it in writing and notify all recipients.
Both pools, overall, have important factors worth considering, here is one that involves shareholders.
If a corporation pays the eligible dividend, and it is made excess of the GRIP, there can be a new corporate distribution tax. Certain penalties can occurs as well. A penalty could be 30 percent of the eligible dividend. Many individuals could be liable for the corporation penalty tax, such as shareholder. When a corporation tells its shareholder to pay a dividend, the payer has to pay the penalty. Enhanced tax benefits, however, are still entitled to the shareholder. This is not a big issues for corporations because the corporate distribution tax is their issue not the shareholder.