Low Rate Income Pool (LRIP)
LRIP is the notional pool tracked by non-CCPCs that restricts their ability to pay eligible dividends, forcing any LRIP balance to be distributed as non-eligible dividends first.
Definition
The Low Rate Income Pool (LRIP) is the non-CCPC counterpart to GRIP. Defined in ITA s.89(1), LRIP tracks income that was taxed at lower-than-general rates by a non-CCPC (for example, when the corporation was previously a CCPC and benefited from the SBD). A non-CCPC that has an LRIP balance must pay out that pool as a non-eligible dividend before it can designate any dividend as eligible.
Key rules
- Who tracks LRIP: non-CCPCs, which includes public corporations and corporations controlled by non-residents, public corporations, or combinations thereof.
- LRIP additions (ITA s.89(1) "LRIP"): generally arise from non-eligible dividends received from other corporations, opening LRIP on ceasing to be a CCPC (based on prior-year SBD-claimed income and other adjustments), and amounts transferred on amalgamations.
- LRIP reductions: non-eligible dividends paid in the year reduce LRIP. A non-CCPC must drain LRIP before paying eligible dividends.
- CCPC election out of CCPC status (ITA s.89(11)): a CCPC can elect to not be a CCPC for eligible dividend and LRIP purposes. This converts the balance from GRIP tracking to LRIP tracking.
- Part III.1 penalty tax (ITA s.185.1): 20% excessive eligible dividend designation tax applies when a non-CCPC pays an eligible dividend while still holding an LRIP balance.
- 2026 shareholder treatment: non-eligible dividends carry a 15% gross-up and a federal DTC of 9.0301% of the grossed-up amount (roughly 9/13 of the gross-up).
| Pool | Who uses it | Feeds | Dividend type |
|---|---|---|---|
| GRIP | CCPCs | General-rate-taxed income | Eligible |
| LRIP | Non-CCPCs | SBD-taxed income carried forward | Must be paid out as non-eligible first |
Example
Cedar Holdings Inc. was a CCPC through 2024 and claimed the SBD on $300,000 of active business income. On January 1, 2025, a US public company acquired 60% of Cedar Holdings, causing Cedar to cease being a CCPC (no longer satisfies the control test under ITA s.125(7)).
Opening LRIP on January 1, 2025:
Under the LRIP formula, the portion of prior SBD-claimed income that was not previously distributed becomes opening LRIP. Assume the calculated amount is $260,000.
During 2025:
Cedar pays a $100,000 dividend. Because Cedar now tracks LRIP and has a $260,000 balance, the full $100,000 must be designated as non-eligible. LRIP drops to $160,000.
Attempting an eligible dividend:
If Cedar tries to designate a further $50,000 dividend as eligible while its LRIP is still $160,000, ITA s.185.1 imposes a 20% Part III.1 tax on the excess designation ($50,000 × 20% = $10,000). Cedar can avoid this by designating the $50,000 as non-eligible, further reducing LRIP to $110,000.
Shareholder treatment:
The individual shareholders include the $100,000 × 1.15 = $115,000 grossed-up amount in income and claim a federal DTC of $115,000 × 9.0301% = $10,385.
Common mistakes
- Treating LRIP as optional. A non-CCPC with any LRIP balance must pay non-eligible dividends first.
- Ignoring the LRIP that arises on a loss of CCPC status. Foreign acquisitions, IPOs, or transfers to a public company create opening LRIP.
- Designating a dividend as eligible without checking LRIP. Part III.1 tax is 20% and rises to 30% if the designation was knowing or with gross negligence.
- Assuming the s.89(11) election reverses automatically. It applies until revoked, and revocation requires written notice.
- Double-counting LRIP by including dividends received from connected CCPCs (which feed GRIP in the recipient, not LRIP).
Related concepts
Authority
- Income Tax Act s.89(1)
- Income Tax Act s.89(11)
- Income Tax Act s.185.1
See also
Related entries
General Rate Income Pool (GRIP)
GRIP is a notional pool tracked by CCPCs that represents income taxed at the general corporate rate and supports the payment of eligible dividends to shareholders.
Refundable Dividend Tax On Hand (RDTOH)
RDTOH is a refundable tax pool tracked by private corporations that returns a portion of federal tax on investment income when taxable dividends are paid to shareholders, split since 2019 into ERDTOH and NERDTOH.
Eligible vs. Non-Eligible Dividends
Canadian dividends are grossed up and taxed with an offsetting dividend tax credit; eligible dividends come from high-rate corporate income and receive a larger credit.
CCPC Status
A Canadian-Controlled Private Corporation is a private corporation resident in Canada that is not controlled by non-residents or public corporations, and CCPC status unlocks the small business deduction, refundable tax mechanics, and the capital gains exemption.
This entry is for general reference. It does not constitute professional tax advice. Consult a qualified Canadian accountant for your specific situation.