Final answer:
The General Rate Income Pool (GRIP) is a Canadian tax concept for CCPCs, which tracks active business income eligible for a lower tax rate and influences the tax rate on dividends. It serves to facilitate reinvestment in the business or tax-efficient dividend distribution.
Step-by-step explanation:
The General Rate Income Pool (GRIP) is a tax concept relevant to Canadian controlled private corporations (CCPCs). It represents a notional account used to track the amount of active business income that's eligible for the lower small business tax rate and has not yet been distributed to shareholders as dividends. The purpose of the GRIP is to encourage corporations to reinvest their earnings into their business or pay out dividends to shareholders at a taxed at a lower rate. When dividends are paid out from the GRIP, they are taxed at a lower rate for the recipient because they carry a higher dividend tax credit.
To calculate GRIP, you would typically start with a corporation's active business income for the year and make adjustments for factors such as previous year's GRIP balance, aggregate investment income, and foreign business income. Companies must carefully manage their GRIP balance to optimize their tax strategy and maintain eligibility for certain tax advantages.