General rate income pool (GRIP)

What the balance tracks

GRIP is a tax balance, not a bank balance and not the same thing as retained earnings. The CRA describes it as a figure that generally reflects taxable income that has not been taxed at the small business rate or another special rate. The idea is that a dividend can be treated as eligible only to the extent the corporation has been taxed at the higher general rate on the income behind it.

A corporation that has earned mostly small-business-rate income will tend to have a small pool, even if its books show healthy profits. A corporation whose income has been taxed at the general rate will tend to build one. Our small business deduction entry explains which income gets the lower rate.

Why it matters when you pay a dividend

A CCPC may pay eligible dividends up to its GRIP without incurring Part III.1 tax. The pool is measured at the end of the tax year, so a corporation can pay eligible dividends during the year as long as, at year-end, the eligible dividends it paid do not exceed its GRIP.

If a corporation designates more as eligible than it has capacity to pay, the excess is generally subject to Part III.1 tax at 20% of the excessive designation. In a tax avoidance situation an additional 10% can apply. The CRA expects Schedule 53 with the T2 return if you paid an eligible dividend or your balance changed, and you can view the balance on the CRA’s View return balances service in My Business Account.

A simple illustration

Suppose, for illustration only, that a corporation’s GRIP is $40,000 at year-end. During the year it paid its owner $25,000 and designated all of it as eligible. That fits within the pool, leaving room for $15,000 more. If it had designated $55,000 as eligible, the $15,000 over the pool would be an excessive designation, and Part III.1 tax of 20% of that amount, or $3,000, would generally apply. A corporation with no pool would normally pay other than eligible dividends instead.

The numbers are round and invented. Real pools depend on several adjustments that Schedule 53 sets out.

Common mistakes

The usual error is designating dividends as eligible out of habit, without checking the balance. A second is assuming a large retained earnings figure means a large GRIP. A third is forgetting that eligible status needs a written designation to shareholders, which the eligible dividend entry covers. Late designations are possible only within limits, so decide the designation when the dividend is declared and keep a copy.

What to discuss with your accountant

Ask what your current GRIP is, how much of a planned dividend can safely be designated as eligible, and whether last year’s Schedule 53 was filed. If you also hold a capital dividend account or investment income, ask how the pools interact. Bring prior returns, dividend resolutions and any shareholder notices.