Lower Rate Income Pool (Non-CCPCs)

Lower Rate Income Pool (Non-CCPCs)

What is the Lower Rate Income Pool (LRIP)
  • The LRIP is tracked by all Non-CCPC’s and it represents income that was taxed at low rates
  • Non-CCPC’s mainly pay taxes at the general rate; therefore, in most occasions the dividends they pay are considered eligible dividends
  • However, there are times when a non-CCPC may be subject to the low tax rates; for example:
    • A CCPC that became a Non-CCPC may have been subject to the low tax rates before this transition
  • Dividends paid out of the LRIP is considered Non-Eligible Dividends (which are taxed unfavourably at the personal level)
LRIP formula

LRIP @ End of Tax Year =

LRIP at the end of the previous year
+ Income Subject to the Low Rate if Corporation was a Non-CCPC in a previous year
+ Non-Eligible Dividends Received
– Non-Eligible Dividends Paid
– Excess Eligible Dividend Designation (EEDD)

Non-Eligible Dividends
  • When a Non-CCPC pays dividends, these dividends are considered non-eligible dividends to the extent of the balance in the LRIP
  • A corporation needs to clear out the LRIP before they can designate a dividend as eligible
  • Once the LRIP balance is fully eliminated, the remainder of the dividends is considered eligible dividends
    • This works opposite of the GRIP that CCPC’s need to maintain; when dividends are declared, a company can choose to pay it out of GRIP. On the other hand, non-CCPC’s that declare dividends, must pay out of LRIP first.
What if I pay Eligible Dividends when LRIP is not fully eliminated?
  • CRA will assess a Part III.1 tax
  • Part III.1 Tax = 20% * the Excess Eligible Dividends Designated (EEDD)
  • EEDD = lesser of:
    1. Eligible Dividends Paid; and
    2. LRIP balance at the time dividends are paid
  • CRA is very strict here, even if you pay sufficient non-eligible dividends to clear out the LRIP, if at the same time you pay eligible dividends CRA will still apply the Part III.1 tax.

TIP:

  • Clean out your LRIP wait a day, then declare eligible dividends
  • DO NOT declare an eligible and non-eligible dividend on the same day when you still have some balance in the LRIP (even if the non-eligible dividend is sufficient to clean out the LRIP)
Example | Part III.1 Tax and Planning Tips

Suppose I paid Dividends of $20,000 on June 5, 2017, and I designated $10,000 to be Eligible. At the time when dividends were paid, the LRIP was $10,000

  • Per the Tax Act, before designating any eligible dividends, I need to clean out the $10,000 in LRIP, wait at least 1 day, then pay out the remaining $10,000 to avoid Part III.1 Tax.
  • I paid $10,000 in non-eligible dividends; therefore the LRIP is cleaned out on June 5
  • The problem is that I still paid eligible dividends when there was a balance in LRIP on June 5 (I didn’t wait a day)
  • CRA will assess a Part III.1 Tax equal to 20% * the lesser of
    1. Eligible Dividends Paid= $10,000
    2. LRIP at the time dividends paid = $10,000
  • Part III.1 tax = 10,000 * 20% = $2,000

How could I have escaped this $2,000 in additional taxes?

  • If I paid $10,000 non-eligible on June 5, 2017; and paid the remaining $10,000 non-eligible the next day on June 6, 2017, I could have saved $2000 in taxes!

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