Line 710 - Part III.1 tax payable

Line 710 - Part III.1 tax payable

A corporation that designates dividends as eligible dividends that exceed its capacity to pay such dividends is subject to Part III.1 tax. The tax is equal to 20% of the excessive eligible dividend designation.

Use Schedule 55, Part III.1 Tax on Excessive Eligible Dividend Designations, to calculate any Part III.1 tax payable and file it with your T2 return.

In the case where an excessive eligible dividend designation is determined to be part of a tax avoidance scheme, the 20% tax plus an additional 10% tax will apply to the whole dividend designation.

Eligible dividend

An eligible dividend is any taxable dividend paid to a resident of Canada by a Canadian corporation that is designated by that corporation to be an eligible dividend. The corporation does the designation by notifying, in writing, each person or partnership at the time it pays them the dividend. For more information about the notification guidelines, go to canada.ca/taxes-eligible-dividends and select "Designation of eligible dividends."

A corporation is allowed to designate a portion of a taxable dividend (rather than the whole amount) to be an eligible dividend. Late designations are allowed, if they are made within three years, or in some situations, six years, after the day on which the designation was first required to be made and, in the opinion of the minister, it is just and equitable to do so (including to affected shareholders) in the circumstances. The designation is deemed to have been made on the day the designation was required to be made.

A corporation's capacity to pay eligible dividends depends mostly on its status.

General rate income pool (GRIP)

A CCPC or a deposit insurance corporation may pay eligible dividends to the extent of its GRIP- a balance generally reflecting taxable income that has not benefited from the small business deduction or any other special tax rate- without incurring Part III.1 tax. The GRIP is calculated at the end of the tax year. However, a corporation can pay eligible dividends over the course of the year as long as, at the end of the year, the eligible dividends paid do not exceed its GRIP.

Use Schedule 53, General Rate Income Pool (GRIP) Calculation, to determine the GRIP and file it with your T2 return. You should file this schedule if you paid an eligible dividend in the tax year, or if your GRIP balance changed, to ensure that the GRIP balance on CRA's records is correct.

You can view GRIP balances using the "View return balances" service through:

• My Business Account at canada.ca/my-cra-business-account, if you are the business owner

• Represent a Client at canada.ca/taxes-representatives, if you are an authorized representative or employee

Low rate income pool (LRIP)

A corporation resident in Canada that is neither a CCPC nor a deposit insurance corporation can pay eligible dividends in any amount unless it has an LRIP.

The LRIP is generally made up of taxable income that has benefited from certain preferential tax rates. The corporation has to reduce its LRIP to zero by paying out ordinary dividends before it can pay an eligible dividend, or it will be subject to Part III.1 tax. The LRIP must be calculated at the time a dividend is paid or received or any other event occurs affecting the LRIP balance in the year.

Use Schedule 54, Low Rate Income Pool (LRIP) Calculation, to determine the LRIP, throughout the year. File the completed schedule with your T2 return. All other calculations including the worksheets should be kept with your records in case the CRA asks for them at a later date.

Election not to be a Canadian-controlled private corporation

A CCPC can elect not to be a CCPC for purposes of the eligible dividend treatment. If it so elects, it is deemed not to be a CCPC for the tax year in which it makes the election and all later tax years, until it revokes the election. The CCPC will lose its entitlement to the small business deduction. However, no other benefits of CCPC status will be affected.

A corporation that revokes an election will become a CCPC again for the tax year that follows the tax year in which the revocation is made.

Use Form T2002, Election, or Revocation of an Election, not to Be a Canadian-Controlled Private Corporation, to make or to revoke an election previously made, and file it by the due date of the T2 return. The CRA will not accept an election or revocation of an election after the filing due date.

Election to treat excessive eligible dividend designations as ordinary dividends

Corporations that make excessive eligible dividend designations may be allowed to elect to treat the excessive amounts paid as ordinary dividends. In order to do so, the corporation must have the concurrence of its shareholders who received, or were entitled to receive, the dividend and whose addresses are known to the corporation. For more information, go to canada.ca/taxes-eligible-dividends and select "Election to treat excessive eligible dividend designations as ordinary dividends."

Corporations cannot elect to treat excessive eligible dividend designations that are subject to the 30% Part III.1 tax as ordinary dividends.

References
Sections 185.1 and 185.2
Subsections 89(11) to (14)

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