Dividend Tax Rates used in Corporate Concepts

With the changes to the taxation of dividends, we’re frequently asked “what personal dividend tax rate do I use with corporate concepts – the new lower eligible dividend tax rate, or the higher ineligible dividend tax rate?”

The personal dividend tax rates used in corporate concepts are used to determine the after tax amounts received by shareholders of the corporation; for example: the “Net Estate Value” in Corporate Estate Bond, and the “After Tax Dividends to Shareholder” in Corporate Insured Retirement Program.

Which personal dividend tax rate you use depends on the circumstances of the particular company. Eligible dividends can only be paid out if the corporation has a “General Rate Income Pool” or “GRIP” balance.

In many cases, the corporation which will own the insurance is an investment corporation. Investment corporations only generate GRIP from eligible dividends they receive – generally on shares of publicly traded companies. As a result, investment corporations are unlikely to have large GRIP balances, and therefore, in most cases, the appropriate dividend rate to use is the higher ineligible dividend tax rate.

If the corporation is a company operating an active business, it will generate GRIP primarily from active business income that is subject to the high rate of corporate income tax. This means significant GRIP balances will only arise if it has corporate taxable income in excess of the federal small business income threshold (which currently ranges from $400,000).

As a result, if the corporation typically reduces its income to the small business threshold by paying a bonus to shareholders (i.e “bonusing down”), it is unlikely to have a very large GRIP balance in the future, and therefore the appropriate dividend rate to use is the higher ineligible dividend rate. If, however, the corporation earns income well in excess of the small business limit and is not bonusing down, then it may be appropriate to assume there will be GRIP balances available in the future, and the lower eligible dividend tax rate could be used.

April 2008