Corporation GRIP As a Tax Slashing Weapon

general rate income pool

What is corporate GRIP?

GRIP (General Rate Income Pool) is a notional account, which means it only exists on paper for doing taxes. This account describes the amount of money that a Canadian Controlled Private Corporation (CCPC) can pay out as eligible dividends to its shareholders.

Eligible dividends are taxed at a lower personal tax rate. This is meant to account for the fact these eligible dividends are paid out by a company that has already been taxed on the income at a higher corporate tax rate. It is part of how our tax system tries to achieve tax integration.

The goal of tax integration is that a dollar earned will be subjected to the same tax burden by the time it reaches an individual – whether that is done directly, or through a CCPC (such as a professional corporation). Tax integration is not perfect. With a few exceptions, if you simply take all of the money that you earn and pass it through a corporation, you usually pay slightly more tax than an individual getting paid directly. The main advantage to a corporation is tax deferral from the initial lower corporate tax rates. The initial low corporate tax rate leaves you more money in the corporation, called “retained earnings”, that you can invest and grow further.

Why does understanding GRIP matter to business owners?

It sometimes seems like accountants speak a different language with all of the bizarre terms and acronyms. I think it resembles Klingon, and we previously translated redundable dividend tax on hand (nRDOTH and eRDTOH) into English. It was a little awkward and dangerous, like walking in on a Klingon mating ritual; but we survived unscathed. You also need a strong grasp of GRIP to hold onto your bat’leth when the Klingon tax collectors come calling. Used wisely, it could trim your tax bill. If not careful, it could also remove your fingers, toes, or other appendages.

The nuances of GRIP and Refundable Dividend Tax On Hand (RDTOH) can raise or lower your overall tax bill.

  • If your CCPC makes over $500K/yr in active income and generates investment income from interest, foreign dividends, or taxable capital gains. You can trigger a partial tax refund to your corporation for these types of investment income using the GRIP generated by your active income. This results in a tax savings. Using your GRIP and RDTOH to save tax on investment income was translated in detail from accountant Klingon previously.
    professional corporation investment income
    Klingon tax collectors discuss using GRIP and RDTOH to lower tax on investment income. They don’t look happy.

    The maneuver results in a 5% absolute reduction in tax on those forms of investment income compared to dispensing ineligible dividends. That would be a $500 tax savings for every $10K of investment income. The government is obviously unimpressed about this and moved to eliminate it with the 2018 Federal Budget.  We only have until the end of our current corporate fiscal year ending in 2018 before they yank this tax cutting weapon out of our hands.

  • After 2018, if your CCPC is going to have active income above the new sliding SBD threshold. Then, you will want to consider how well that translates into personal income using GRIP and eligible dividends compared to lowering your active business income by paying more salary. Understanding GRIP lays the groundwork for us to explore this important decision-making in a future post.
  • For CCPCs with passive investment income, the GRIP generated by receiving eligible dividend income can increase your personal cash-flow and lower your tax burden. We will explore this in detail later in this post.

You will want to pay attention and not put this off. Let’s start with describing how GRIP is calculated and allows us to give eligible dividends.

Calculating GRIP for a CCPC such as a professional corporation

A Klingon food critic. Bloodshed usually follows.

The four-page long complex GRIP calculation tax form is available on the CRA website. I found that form about as digestible as Klingon cuisine. So, I will spare your palates and give a basic translation from accountant Klingon into English below.

Basically, you have a starting balance based on your previous GRIP minus eligible dividends that you have already dispensed. You generate new GRIP that you add to your balance through active income above the SBD threshold or by receiving eligible dividends from other companies.

Next, subtract eligible dividends that you dispense from the GRIP balance, and you have your new start point for the following year.

A more detailed look at generating new GRIP:

a) Earning active business income above the small business deduction (SBD) threshold.

The default SBD threshold is $500K for most provinces, but that could now be less if you have passive investment income that counts and shrinks your active income limit. To calculate the GRIP balance created by that income over the SBD limit, multiply it by the “general rate factor” for the year. That factor is currently 0.72, and is set by the Federal Government. It is based on subtracting the average general federal/provincial corporate tax rate (about 28%) from 100%.

For example, a medical professional corporation (MPC) earns $700K net active income in Ontario with a SBD threshold of $500K. The MPC will pay the Ontario/Federal combined general tax rate on $200K of that $700K. It also generates 0.72*$200K = $144K for its GRIP account.

b) Earning investment income as eligible dividends from another company.

These dividends would usually come from holding stocks in a dividend paying publicly traded Canadian company or a fund that holds those stocks. However, it could also be an eligible dividend paid by another private company from their general rate income pool. Receiving this type of income adds dollar for dollar to the GRIP account of the receiving CCPC.

For example, if our MPC holds ETFs that pay us $25K in eligible dividends, then that adds $25K/yr to our GRIP account.

Simply add the amount generated from active business income to that from eligible dividend investment income to get the total added to the GRIP balance for the year. For the MPC in our example, that would be $169K.

When you have a positive balance in your GRIP account, you can elect to give lower taxed eligible dividends.

To give yourself an eligible dividend from your corporation, that needs to be designated in writing. That includes a letter to shareholders, notation on dividend cheque stubs, or a notation in the corporate minutes. You should do this in conjunction with your accountant because you don’t want to mess it up and incur penalties.

Let’s say with our MPC example, we paid out $100K of eligible dividends. That would leave us with 69K in our GRIP account to start with the following year.

The example of GRIP calculation for our hypothetical MPC in the above text is summarized in the flow chart below.

canada corporate taxation

How can GRIP keep your money in your fist and out of the hands of the taxman?

The GRIP generated by receiving eligible dividends in your corporate investment account can allow you to pass money out of your corporation more efficiently. This is illustrated in the comparison chart below using the Ontario top marginal tax rates.

CCPC investment tax savings

Generating GRIP using eligible dividend paying investments in a corporate portfolio can help you get the personal cash flow that you need while retaining more earnings to invest in your corporation.

Let me illustrate this idea from another more practical angle as the driver – how much money you need to take out of your corp to pay for your lifestyle :

An MPC that makes $400K net clinical income and pays the owner $150K salary has a net active income of $250K. It also has an investment portfolio that generates $50K/yr in eligible dividends. With that active and passive income level, it is below the SBD tax threshold still. They need $137K/yr (after tax) to fund their lifestyle. It would take a $50K eligible dividend from the MPC to the owner to achieve that after-tax income, and with the $50K GRIP generated by the investment portfolio, they can do that.

If instead of the eligible dividend distributing investments, they used one that made the equivalent as unrealized capital gains only (such as with a swap-based ETF), then they would not have any GRIP and would have to give ineligible dividends instead. It would take an ineligible dividend of $57300 to give the same after-tax cash flow. That is $7300 less money retained in the CCPC to invest and grow. Per year. Think of how that annual increase in invested retained earnings in the corporation account could grow over time.

For this strategy to work optimally, you do need several conditions:

  • Your corporation pays out enough dividends to trigger all of your eRDTOH. This would be $2.61 for every $1 of RDTOH. In the case of eligible dividends, that means paying out $1 of eligible dividends for every $1 received from investments. By trigging refund of all of your eRDTOH, you are making the tax drag of eligible dividends in your corporation investment portfolio zero.
  • There is enough cash flow inside the corporation to pay out the dividends from active income without touching your investments and investment income. If you have to use the money from the dividends from your investments, then you are simply passing the money through (the original intention of GRIP) with no change in tax burden.
  • You actually require the personal cash flow from the dividends from your corporation. If you start paying out more dividends from your corp just to release the RDTOH when you don’t need the money, then you are decreasing the tax deferred growth from retained earnings in your corporation. I don’t foresee this being an issue for me personally, as we certainly have no problems spending money to support our lifestyle.
  • The combined passive investment income and active business income of the CCPC does not push its income over the small business deduction threshold. If that happens, then the tax advantage switches to investments that do not increase aggregate investment income and bump more of the corporation’s active income into the higher general corporate tax zone.

Some notes on safety while weilding your bat’leth.

When thinking about tax optimization, it is important to remember its place in the hierarchy of your planning. An asset mix that suits my goals and risk tolerance would be my primary concern, with tax efficiency being a secondary consideration. Paying less tax doesn’t help much if it is due to poor portfolio performance.

When considering this strategy, you need to also bear in mind that you probably don’t want to just hold a non-diversified portfolio of Canadian dividend paying funds. Canada only represents about 4% of global markets and having a globally diversified portfolio helps to mitigate investment risk. For example, to generate 50K/yr in eligible dividends using Canadian equity ETFs yielding ~2.5%, then you would require $2M of them. If you wanted Canadian equity to be 20% of your overall portfolio, that would mean you need to have a $10M portfolio for that to work out! Plus, if you hold other income producing assets in your corporation account as part of a balanced portfolio, or realize any capital gains through re-balancing, then that could also add up and shrink your SBD threshold.

Be careful how you swing your tax bat’leth – you don’t want to cut off your nose in spite of your face. You don’t see many long-nosed Klingons walking around.

However, you will want to consider the lessons in this post if you are considering using swap-based ETFs or corporate class mutual funds in your corporation. Those products have some excellent advantages in some situations and less so in others. We will be sure to model some scenarios comparing an eligible dividend paying conventional ETF like XIU to HXT (its swap-based comparator) soon in The Sim Lab.




  1. Hi LD,

    Ofcourse I will need to read this post like a gazillion times later on to digest what you are saying.

    I am planning on a 20% Canadian ETF mix. When we overweight Canadian equities we reduce our currency risk. But we would likely increase our global capitalization risk. My right answer is to keep it closer to 20% for now.

    Excellent post LD!

    1. Thanks Dr. MB.

      I honestly find this accounting stuff a bit hard to digest too. This kind of post usually evolves over 2-3 weeks for me as I research/write and double check things. Hopefully the flow charts/examples help – creating them is what usually finally makes me get it. Most accounting nuances don’t matter much to us because tax integration generally works really well. There are a few potential nuggets that can matter which I am trying to highlight as I come across them. My overall investing plan would always take precedence, but optimizing the tax piece when able helps the same as minimizing fee drag.

      There are definitely some good reasons to hold more maple equity than Canada’s global share. The fact that we live in $CAD and the potential tax benefits of eligible dividends are the two that resonate with me the most. Commodities tend to perform better late in economic cycles which is probably where we are and the Canadian market has got to be due for some catch up to other markets at some point, but I am honestly not that sophisticated of a market timer to attempt to get that part right. My Canadian equity weighting goal is pretty similar.

  2. That’s a lot of information!

    thanks LD for taking the time to go through these dense topics. I just hope my accountant knows it all.

    1. Hey BC Doc! It has been personally useful for me. I have changed my approach to shift more eligible dividend payers from my wife’s account to the corporate one. When I contacted my accountant, I found out that I was carrying a GRIP balance that I hadn’t used. We will use it up this year and take advantage of the RDTOH efficiency before it closes.

  3. Great explanation LD! I hadn’t heard of GRIP until reading your post and seeing a flow chart by one of the physicians on the FB group. Good to know about this.

    Do you think most financial planners/advisors are familiar with corporation GRIP (or even RDTOH)? Do they take these concepts into account when devising financial plans for their physician clients? I doubt it.

    Reading your posts like these reinforces my thinking that having a great accountant is the key for a physician whether you are DIY or non-DIY investor.


    1. Absolutely agree regarding having a great accountant. One thing that I have noticed is that there is a big difference between how financial planners who work in isolation focused on products think and those who are part of a multi-disciplinary team think. I have a strong bias towards that model with my ICU background. Very rare to find that though. Thinking on it, I only know of a couple who may consider the nuances I have been talking about and they are not formally affiliated with an accountant-they just think alot about taxes and work closely with accountants.

  4. Question:
    If one had GRIP+eRDTOH and paid out to self through a salary. Would it ever make sense to take a lesser salary to take advantage of the eRDTOH payout?

    1. Hey Stevie! That is a really excellent question and I was literally looking at this yesterday while working on a new calculator. There are a number of moving parts for each individual. It is going to take multiple posts to flesh out, but briefly…

      It could save some tax in the short-term. However, I would be loathed to reduce my salary if doing so reduced my RRSP room. That tax-sheltered room is great over longer holding periods. Particularly for holding less tax-efficient components of an overall portfolio (like bonds) or if an anticipated lower-income tax bracket when withdrawing. Also, if I am over the SBD threshold with my actively earned income, then tax integration generally favors salary to get that money into my hands (except in SK and NF). Outside of those potential downsides, it could work.

      I would actually reframe the question to “Does it make sense to pay-out extra dividends (even though I don’t need extra spending money) to take advantage of GRIP/eRDTOH from my investments?” The answer is usually yes with a few wrinkles.

      1) The first consideration is whether the marginal rate on paying yourself the dividend is less than the eRDOTH rate. It usually is. For example, at the highest rate in AB, I would pay 31.71% in personal tax and my corp would be refunded the 38.33% eRDTOH. In a mid to low tax bracket in Ontario, it would also work. However, at the highest tax bracket in Ontario, I would pay 39.34% personally. That would be way better than an ineligible dividend (now 47.4% in 2019) if I need the money to spend, but 1% extra tax compared to 38.33% if I didn’t. Fortunately, in most provinces (not ON,PQ,NF,NS) eligible dividends are favoured – even in the highest bracket. Even in the less-favoured provinces, the marginal tax rate doesn’t become unfavourable until gross taxable incomes of >210K. At that level, you could have a salary of $145K to get max RRSP and still flow $66-73K/yr of eligible dividends through efficiently. It takes a beefy corporate investment account to overwhelm that!

      2) The second piece is what you do with the extra money that you have tax-efficiently flowed through the corp. If you blow it – no advantage. If you invest it – an advantage. TFSA would be the top choice. If TFSA is full, a taxable investment account is the second choice. If you have a markedly lower-income spouse, using the extra money to pay all living expenses while they invest all of their income in an account attributable only to them can also be great. For example, in Ontario, if my wife had an income under $45K/yr she would have an effective tax rate of -6.86% on eligible dividends in her name. Hilarious!

      Thanks for the great question!

  5. In the past, GRIP for me solely came from investment income, and it made sense to clear the GRIP every year. But the passive income limits are now applicable to me, and some active business income is ending up in the GRIP. I assume that it continues to make sense to clear the GRIP of investment income, but not clear the GRIP of active business income. This may be a naive question, but I’m not an accountant.

    1. Hey Park. That is an excellent question. I have actually spent a lot of time modelling it. If you need the money, it is easy. Move it out. The GRIP, even though notional, is in nominal dollars. So, its value erodes with inflation over time. Ben Felix and Braden Warwick do a nice job describing that as part of their recent IPP paper. Around figure 3.

      If you don’t need the money, GRIP that also has associated eRDTOH is also efficient to move out if your eligible dividend rate is under the 38.33% percent refunded to the corp. For GRIP generated from active income taxed at the general corporate rate, it is only efficient if you need the money. The first step would be to reduce salary (even at the expense of RRSP or IPP room) and pay more dividends. If all dividends and you don’t need the money, that GRIP gets trapped and the value slowly erodes. I have modelled that with this simulator. I haven’t made it fully public until I write about how it works, but it is pretty cool. Incidentally, I face exactly the same issue as you and after modelling am going to all dividends for a few years to clear out my GRIP. Probably splurge on personal spending a bit too (so that I “need the money). 😉

      1. I hadn’t thought about it, but all the notional accounts ( RDTOH, CDA, GRIP) are nominal in nature. So their value does erode with time, due to inflation. That’s relevant, when it comes to tax planning.

        Over the last 10 years, inflation has been around 2% per year. But there are periods where it has been much higher and not for 1-2 years as lately. The notional accounts are somewhat like nominal fixed income, when it comes to inflation sensitivity.

        I hadn’t thought much about ABI taxed at the general corporate tax, as it wasn’t an issue until recently. I don’t think that degradation of tax deferral due to inflation is a problem with ABI taxed at the small business rate. But the GRIP is where you get the tax deferral on ABI taxed at the general corporate rate. If you clear out the GRIP secondary to such income, you’ve lost the tax deferral. OTOH, if you don’t clear out the GRIP secondary to such income, you’ll lose part of the tax deferral each year due to inflation.

        CCPCs allow income smoothing and income splitting (in retirement). But tax deferral is probably the major reason most physicians have a CCPC. If a physician has a CCPC primarily for the tax deferral and the passive income limits are an issue, it looks like the rationale for a CCPC is weaker. And that’s ignoring the higher general corporate rate relative to the small business rate.

        The issue of a CCPC paying the general corporate rate has been around for many years. What have the larger CCPCs done about the GRIP?

        Please remember, IANAA.

        1. Yes. The GRIP from ABI is the least important of the notional accounts when comes to erosion by inflation. Not a major problem (in my opinion), but if you can use the money personally then I’d free it up. Plus, in Ontario or NB if the general corp tax that generated the GRIP was caused by the passive income rules bumping you up only the Federal tax rate bumped and the net effect is an actual tax savings. The blended Fed/Prov corp rate is only ~17-18% in that zone and you grip as if the corp paid 27%. So, you may even get a bit of a better start place. The account where the inflation does really matter is the capital dividend account since it represents a chance to move money out of the corp tax-free (having paid corp cap gain tax already) that is eroding. A very valuable account in post-tax terms. Similarly, eRDTOH and nRDTOH that get stuck in the corp are in between CDA and GRIP from ABI. I suspect that the owners of the really large corps just have to accept that there is some tax drag on their business income, but I also suspect that it doesn’t have a material impact on their overall lifestyle spending abilities.

      2. Mark, from the second paragraph in your comment – can you have GRIP without associated eRDTOH? I though they went hand in hand? if so, how does that work? Also, within the GRIP account is the GRIP from ABI income and investment income in sub accounts? I guess not so you need to track them seperately.

        1. Hey Grant. It is possible to get GRIP without getting eRDTOH. That can happen if the corporation has some active income taxed at the general rate. It all goes into one GRIP account whether generated from active or passive income.

          For example, if my corporation got $100 of eligible dividend income, I would get $100 added to GRIP (plus $38 of eRDTOH). But, if it also had $501K of active income, the $1K over the SBD limit also generates GRIP (but no eRDTOH). It would add $720 to my GRIP. So, the total GRIP available would be $820. The eRDTOH gets emptied out by the first eligible dividends that my corp pays. So, I could pay $100 of eligible dividends and empty my eRDTOH, but still have $720 of GRIP to use for paying more eligible dividends.


  6. For GRIP generated from income over the SBD, is this calculated based on total income flowing into the CCPC, or net income after salary? For example, if the income flowing into the CCPC is 600k/yr but I pay a salary of 150k/yr, am I below the SBD and therefore not generating any GRIP (net 450k), or am I generating 72k grip at the 0.72 rate?

    Thank you for making me actually able to understand this!

    1. Hey Josh. Great and common question. It is net. So, if your corp has $600K revenue after regular overhead plus pays you $150K salary. The net is $450K and all below the SBD. No corporate tax at the higher general corporate tax rate and no GRIP.

      If your SBD was shrunken due to the passive income rules to say $300K instead of the usual $500K. Then, only the part over the SBD is subject to the higher corporate taxes and generates GRIP. In our example, that would be $450-300K = $150K taxed at the higher rate. It would generate $150K*0.72=$108K GRIP. So, your corp pays extra tax. You get some personal tax savings due to $108K eligible dividends compared to ineligible ones. When you add the corporate tax and personal tax together, it is a bit worse than a non-incorporated person. I wrote more about that tax integration in my article on salary.

      Hope that helps.

  7. Ok, got it. So, the GRIP from ABI is not as efficient as from investment income, as there’s no RDTOH, but still pretty good as taxed favourably on the personal side, and especially as Ontario doesn’t do the passive income limits. Thanks!

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