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Tuesday, March 13, 2007

Eligible vs. Non-eligible dividends

Eligible dividends are taxed at a reduced federal rate, by way of an enhanced gross-up (45%) and tax credit(27.5%) for these dividends received by individuals and trusts. This helps to balance out the inequitable tax treatment between a non-CCPC and a CCPC.

Ineligible dividends are those that have existed up to this point, based on an assumed 32% corporate tax rate, the existing gross-up of 25% and tax credit of 16.667% of actual dividends. These rates will continue to apply.

For CCPC's (Canadian Controlled Private Corporation), an eligible dividend is: a dividend that is paid out of the corporation's general rate income pool (GRIP). For calculation purposes, the total eligible dividends declared for the year will be compared to the GRIP balance at the end of the year. This eligible dividend designation is at the discretion of the company paying the dividend, as long as the GRIP balance covers this amount. The designation must be made on the entire dividend: either eligible or not AND this designation would apply to all shareholders.

T5 forms now have boxes available for ineligible (box 10) and eligible dividends (box 24).

For non-CCPC's the situation is the opposite. All dividends will be eligible dividends unless the corporation has a 'low rate income pool' (LRIP). An important difference is that these non-CCPC's do not have discretion as to whether the dividend is eligible or not. The LRIP balance MUST be paid out first as an ineligible dividend before eligible dividends can be paid.

If an eligible dividend is designated when the LRIP has a positive balance then the excess dividend tax will apply.
Note: A non-CCPC generally won't generate its own low-rate income. Therefore, the assumption is that all taxable dividends will be eligible. The exception is if a LRIP pool exists.

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