What is GRIP and why does it determine whether my corporation can pay eligible dividends?

GRIP stands for General Rate Income Pool, and it's a notional account tracking how much of your corporation's income has already been taxed at the higher general corporate rate rather than the lower small business rate. It matters because GRIP determines how much your corporation can designate as an "eligible dividend," a type of dividend that gets more favourable personal tax treatment in the shareholder's hands, reflecting the fact that the underlying corporate income already bore a higher rate of corporate tax.

Income taxed at the small business rate doesn't generally build up GRIP, since it hasn't borne the higher general corporate rate that eligible-dividend treatment is meant to account for, so a corporation relying heavily on the small business deduction often has little or no GRIP, and dividends paid from that income are generally non-eligible, ordinary dividends instead, taxed less favourably to the shareholder than an eligible dividend would be.

Tracking your GRIP balance accurately matters because it directly caps how much you can designate as eligible in a given year, and getting the designation wrong by exceeding your available GRIP carries its own tax consequence, discussed further elsewhere, so accountants monitor this balance closely alongside RDTOH when planning dividend payments.