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:
- Eligible Dividends Paid; and
- 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
- Eligible Dividends Paid= $10,000
- 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!