Low Rate Income Pool (LRIP)

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"): include non-eligible taxable dividends received and applicable transition, investment-income and reorganization amounts. Opening LRIP on losing CCPC status uses the statutory tax-balance-sheet calculation, not simply the prior year’s SBD income.
• 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).

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:

Assume a separate calculation under subsection 89(8), including the corporation’s assets, liabilities and other prescribed adjustments, establishes opening LRIP of $260,000. This amount is an example input; it cannot be derived from the $300,000 income figure alone.

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:

Assuming the dividend is received by Canadian-resident individual shareholders, they 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 ordinarily 20% of the excessive designation; the statutory tax-avoidance case adds 10% on the whole designation.
• Assuming the s.89(11) election reverses automatically. It applies until revoked, and revocation requires the prescribed election process and the Minister’s concurrence.
• Ignoring a non-eligible dividend received from a connected CCPC. Its dividend type and the recipient’s status matter: it can add to a non-CCPC recipient’s LRIP.

Use CRA’s LRIP guidance, transition formulas, and Part III.1 rules.

Related concepts

• General Rate Income Pool (GRIP)
• Refundable Dividend Tax On Hand (RDTOH)
• Eligible vs. Non-Eligible Dividends
• CCPC Status