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Understanding dividend payment in Canada is essential for legal, tax, and compliance teams managing corporate obligations across jurisdictions. This article outlines the key legal requirements, financial constraints, tax implications, and board responsibilities that surround dividend distribution under Canadian law.
What must directors check before declaring dividends?
Before any dividend is issued, Canadian law imposes a strict solvency test. The company must confirm that, after the dividend is paid, it will be able to meet its liabilities as they become due and that its assets will still exceed its liabilities and stated capital.
How are dividends documented and executed?
The Board of Directors must formally approve dividends by resolution, including key details like:
- The amount per share
- The class or series of shares affected
- The record date (if applicable)
- The payment date or confirmation of immediate payment
- A clear statement of solvency
There is no mandatory waiting period between declaration and payment. Directors can decide on immediate or future payment dates, provided they satisfy the solvency test at the time of payment. However, they must respect internal corporate documents like the articles of incorporation or shareholder agreements, especially regarding rights attached to specific share classes.
What about interim and deemed dividends?
Interim dividends, those paid before annual financial results are finalised, are permitted and follow the same solvency requirement. These are usually declared quarterly or mid-year and require only board approval, not shareholder approval.
How should dividends be reported to the CRA?
Tax classification matters. If the dividend qualifies as an eligible dividend, offering tax advantages such as an enhanced dividend credit, it must be designated in writing at or before the time of payment.
Public companies may notify shareholders through websites, reports, or press releases. Once made, these designations remain valid unless withdrawn.
Corporations must file a T5 information return for taxable dividends. Missing this deadline triggers penalties ranging from $100 to $7,500, depending on how late and how many recipients are involved. For capital dividends under Section 83(2), a separate election form is required. Late submissions may still be accepted but attract monthly penalties and are subject to a strict 90-day cure period if prompted by the CRA.
What rules apply to preference dividends?
Preferred shareholders typically enjoy priority over common shareholders when it comes to dividends. Their dividends are often fixed and must be fully satisfied before any dividends can be paid to other classes of shares.
However, Canadian corporate law does not automatically require payment of preference dividends. Directors must first declare the dividend, and even then, failure to pay does not constitute a statutory breach unless the corporation’s articles clearly state an enforceable entitlement.
That said, if directors pay dividends to common shareholders while neglecting previously declared or contractually required preference dividends, this may constitute unfair prejudice, particularly in private corporations. In such cases, preferred shareholders may have legal recourse, and directors could be found in breach of duty.
What’s next?
Managing a dividend payment in Canada requires detailed planning and full legal awareness. For more insights into processes in other jurisdictions, explore our article Companies House ID Verification: UK Reform Explained.
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The information provided on Klea’s website is made available “as is” for informational purposes only. Klea does not provide legal, tax, or financial advice and is not responsible for any actions taken or not taken based on the content found on this website. In no event shall Klea be liable for any loss or damages arising from reliance on the information contained herein.
For specific legal or compliance support tailored to your business needs, please contact Klea directly. Our team provides personalised guidance and expert solutions. Any reliance on general content without direct consultation does not establish any legal responsibility or liability on Klea’s part.