There are a handful of other terms that come up when you’re talking about the tax of dividends in Canada. However, unless you’re a practicing accountant that is actually preparing and filing corporate income tax returns, all you really need is a basic understanding of the concepts.
The dividend gross up basically means that the CRA looks at the dividends you received and goes “yeah… I get that you received a non-eligible dividend of $1,000 but let’s just pretend its $1,160 and then tax you on that, okay? Oh wait! Those are eligible taxable dividends? Let’s pretend it’s $1,380 instead!”
Yes, that’s literally how it works – sounds terrible, right? Luckily, this is offset by this wonderful thing called a dividend tax credit.
Dividend Tax Credit
Taxes have a way of being unnecessarily confusing. Remember how in the gross-up the CRA decided we needed to increase the taxable amount of dividends? Well, the CRA can be a little bit indecisive. Later on in the return, they realize they were a bit “extreme” so they give you some of that back in the form of the dividend tax credit. In fact, you get both a Federal and a Provincial dividend tax credit.
General Rate Income Pool (GRIP)
This is an account that tracks the profits that a CCPC generates which are taxed at general corporate income tax rates. The amounts in the GRIP can be paid out by the CCPC as eligible dividends.
Low Rate Income Pool (LRIP)
This is an account that tracks the profits that a non-CCPC generates which were subject to reduced tax rates. A non-CCPC has to reduce the LRIP to zero through non-eligible dividends before it can pay eligible dividends.