Eligible dividend designation: in writing at payment, up to GRIP

Which dividends should your client designate as eligible?

Start with who is paying. A CCPC (or a deposit insurance corporation) measures its room against GRIP, the general rate income pool. Any other resident corporation works the other way round: it has to pay ordinary dividends until its LRIP, the low rate income pool, is at zero, or the eligible dividends it pays are excessive canada.ca.

GRIP is measured at the end of the tax year, so your client can pay eligible dividends during the year as long as the total paid by year end doesn't exceed GRIP at that point canada.ca. That means the designation is made on a projection. For how the pool is built, see the GRIP account page.

The refund row matters more than people expect. The dividend refund on eligible dividends comes from ERDTOH only, while non eligible dividends draw on NERDTOH first and reach ERDTOH only after that canada.ca. A company sitting on investment income refundable tax gets nothing back from NERDTOH if every dividend is designated eligible. The pools are covered in RDTOH explained.

How do you make the designation in writing?

Subsection 89(14) says the corporation designates a portion of a dividend as eligible by notifying in writing, at the time it pays the dividend, each person or partnership it is paid to laws-lois.justice.gc.ca. The CRA phrases it as before or at the time of payment, and it can cover part of a taxable dividend or the whole amount canada.ca.

Those methods come from the CRA's designation page canada.ca. The blanket notice is a public corporation route. For an owner managed company, put the designation in the directors' resolution and send it to every shareholder who receives the dividend.

Resolution wording that tracks s.89(14) can be as short as this: "The Corporation designates $55,000 of the dividend declared on Class A common shares and paid on December 15, 2026 as an eligible dividend for purposes of subsection 89(14) of the Income Tax Act, and the remaining $45,000 as a taxable dividend that is not an eligible dividend. A copy of this resolution is to be delivered to each shareholder at the time of payment." Name the dollar amount or the portion, the class, and the payment date. The rest of the resolution, declaration date and solvency, is covered in the dividend resolution page.

Worked example: splitting a $100,000 dividend saves $9,000 and frees $17,250

Your client's CCPC declares a $100,000 dividend to its sole individual shareholder, paid in December 2026. Your projection puts GRIP at year end at $55,000. The company also has $17,250 of NERDTOH and no ERDTOH.

The split version costs nothing and recovers the full $17,250: 38 1/3% of $45,000 is exactly $17,250 canada.ca. The all eligible version owes $9,000 of Part III.1 tax on the $45,000 excess (20% under s.185.1(1)) and leaves the NERDTOH stranded laws-lois.justice.gc.ca.

Here is the T5 for the split version. The 38% and 15% gross ups and the credit fractions come from the CRA's T5 instructions canada.ca.

Box 26 computed as 15.0198% of $75,900 gives $11,400.03; the CRA accepts either method, and the fraction is exact. What the shareholder pays on each type is worked through in the dividend gross up page.

What does an excessive designation cost, and how does the election undo it?

For a CCPC the excess is (A minus B) times C over A, where A is all eligible dividends paid in the year, B is the greater of nil and GRIP at year end, and C is the particular dividend. So the excess is spread across every eligible dividend paid that year laws-lois.justice.gc.ca. For a non CCPC, the excess on each eligible dividend is the lesser of total eligible dividends paid to that point and LRIP at that time, prorated the same way.

The rates and the carve out come from s.185.1(1) and (2), and the tax is due on the balance due day laws-lois.justice.gc.ca. The election treats the elected amount as a separate taxable dividend that is not eligible, paid just before the original. It's due within 90 days after the CRA sends the notice of assessment for the Part III.1 tax, and needs the concurrence of the corporation and every shareholder who received or was entitled to the dividend and whose address the corporation knows. Made more than 30 months after the dividend was paid, it's valid only if every one of those shareholders concurs laws-lois.justice.gc.ca.

Part III.1 tax is calculated on Schedule 55 and reported on line 710 of the T2. Every resident corporation that pays a taxable dividend in the year files Schedule 55, unless the dividend is a capital gains dividend. A CCPC tracks GRIP on Schedule 53 and a non CCPC tracks LRIP on Schedule 54 canada.ca.

Which four mistakes break an eligible designation?

No notice at payment. A dividend paid without written notice is not eligible. The fix is a late designation under s.89(14.1): the CRA can accept it if it would be just and equitable and it's made within three years after the day it was required, and it's then treated as made on time laws-lois.justice.gc.ca. The CRA's page mentions six years in some cases canada.ca. Don't plan on it: write the designation into the resolution.

GRIP projected too high. A loss carried back, an amalgamation or a late adjustment to taxable income can shrink year end GRIP after the dividend is paid. Designating a fixed dollar amount you are confident of, rather than the whole dividend, limits the damage. If the excess still happens, the s.185.1(2) election is the cleanup.

Holding company shareholders. When the recipient is a corporation, fill in box 24 (or box 10) and leave boxes 25, 26, 11 and 12 blank canada.ca. The designation still matters to that holding company: eligible dividends it receives add to its own GRIP under element E of s.89(1) laws-lois.justice.gc.ca. Whether Part IV tax or s.55(2) applies on the way up is covered in intercorporate dividends.

Non CCPCs with leftover LRIP. A corporation that stops being a CCPC adds an amount to its LRIP under s.89(8), worked out from its property, cash and certain balances and reduced by GRIP it never paid out as eligible dividends laws-lois.justice.gc.ca. Until ordinary dividends bring that LRIP to nil, eligible designations are excessive.