Dividends are paid from the after-tax income of the corporations to shareholders. Whether you want to withdraw the salary from your corporation or pay dividends to yourself, it depends on a specific tax situation. Whether you are opting to withdraw salaries or dividends from a Canadian Controlled Private Corporation (CCPC), because of the integration principle of Canadian tax system taxes paid on either of them approximate the same.
Dividends give an opportunity to defer taxes at a personal level by using the timing of issuance of dividends as a tool. The timing of dividend withdrawals directly impacts the personal marginal tax rates.
Process of Dividend Issuance
Payment of dividends is largely governed by the business acts (or laws) of the jurisdiction in which the corporation is incorporated. Generally, directors of the corporation pass a resolution to issue a dividend to shareholders. Corporations must ensure compliance with relevant corporate laws to ensure that they meet the solvency tests and other corporate procedural requirements.
Can a Corporation Issue Dividends if there are losses?
Generally, No! If the corporation has negative retained earnings (losses), it cannot issue dividends. A corporation with negative earnings fails to meet the solvency test.
Technically, dividends are distributions of after-tax profits of a corporation. So, if there are no earnings in the first place, how can they be distributed?
Doing so might be a violation of the Canada Business Corporations Act, the Ontario Business Corporations Act, or other business corporation acts under which the corporation is incorporated.
Section 42 of the Canada Business Corporations Act clearly prohibits issuance/declaration of any dividend if the corporation will not be able to meet its liabilities afterwards or the net realizable value of total assets is less than liabilities plus stated capital of all classes.
What if the corporation has issued dividends or filed T5 from a loss-making business? If you have filed a T5 information return in rush just to meet the deadline, it can be amended or cancelled subsequently.
This is always best to consult your corporate tax accountant in Canada or a professional corporation tax service before issuing dividends.
Filing T5 with CRA
Corporations must file T5 information by the last day of February following the calendar year to which it belongs. Not filing T5 information return on time results in penalties with a minimum of $100 and a maximum of $7500. A T5 information return is an often missed return by small businesses in Canada. T5 needs to be filed annually on a calendar year basis regardless of the fiscal year of the corporation.
Issuance/declaration of dividends can be generally done at any point of time in a year. A common mistake occurs when small businesses or owner-managers start confusing their salary with dividends, or with shareholder loans. When a shareholder loan is repaid to shareholders, it does not need to be reported on T5.
By the time the accountant prepares and files the T2 Corporation income tax return and T5 information return the client has already incurred penalties.
While issuing dividends you need to understand the following terms.
Type of Dividend – Eligible Vs Non-Eligible Dividends
Dividends issued by public corporations are eligible dividends. When a CCPC issues dividend, it can be either eligible or non-eligible dividend.
- When a CCPC pays dividends from its income which is within the limit of the small business deduction, it is called a non-eligible dividend. Small business deduction (SBD) is a reduction in the corporate tax rate for the active business income of CCPCs and is limited to $500,000 for 2019. In certain cases, different corporations share SBD, in all cases, dividends out of this income pool are non-eligible dividends.
- When a CCPC pays dividends from income pools other than the above which are taxed at full tax rates, it is called an eligible dividend. It includes the active business income above the Small business deduction limit.
- Dividends paid out of the portfolio income which is derived from the investments of CCPC in public corporations are eligible dividends and are subject to refundable part IV tax of 38.33%. When CCPC pays these dividends to CCPC’s shareholders, it is eligible for a dividend refund. This way the income is not taxed twice.
- Other investment income, other than the above portfolio income, like interest income when distributed to CCPC’s shareholders, is non-eligible dividends.
Tax-Free Capital Dividends in Canada
Besides eligible and non-eligible dividends, there is a Capital dividend as well. If your corporation has a capital dividend account, it can issue a capital dividend to its shareholders, which is tax-free. A corporation’s capital dividend account is tracked by CRA. Issuing a capital dividend has its own requirements, such as filing of T2054, Schedule 89 and a certified true copy of board resolution.
Since capital dividends are tax-free, whenever, a corporation is planning to issue a dividend, check out the possibilities of issuing the capital dividend.
Dividend Gross up & Dividend Credits
For individuals resident in Canada, non-eligible dividends are grossed up to arrive at taxable non-eligible dividends. Since dividends are already taxed at the corporation level, a dividend credit is available for personal taxes.
For 2019 and previous years, the gross-up factor and dividend credits are mentioned below.
Dividends with NO-TAX
Due to the integration of the Canadian tax system, you do not have to pay any personal tax if your investment income doesn’t exceed a certain threshold. Such a threshold, in 2019 for the province of Ontario is $51,800 for eligible dividends and $30,700 for non-eligible dividends (approximate amounts). This is applicable only if you have dividend income only and no other source of income. be mindful of the implications of AMT.
Dividend Gross up & Tax Credit Rates Canada – 2021
|Non-Eligible Dividends||Eligible Dividends|
|Dividend gross up rate||15%||38%|
|Dividend Tax Credit – Federal (as % of grossed-up taxable dividend)||9.0301%||15.0198%|
|Dividend Tax Credit – Federal (as% of actual dividend)||10.3846%||20.73%|
|Dividend Tax Credit – Ontario (as % of grossed-up taxable dividend)||2.9863%||10.0%|
|Dividend Tax Credit – Ontario (as % of actual dividend)||3.434%||13.8%|
|Dividend Tax Credit – Alberta (as % of grossed-up taxable dividend)||2.18%||8.12%|
|Dividend Tax Credit – Alberta (as % of actual dividend)||2.507%||11.20%|
|The actual amount of Dividends before any regular income taxes are payable – Federal|
(Caution: AMT is applicable on Eligible dividends)
|$30,172||$63,040 (AMT applies)|
|The actual amount of Dividends before any regular income taxes are payable – Ontario|
(Caution: AMT is applicable on Eligible dividends)
|$33,733||$95,807 (AMT applies)|
|The actual amount of Dividends before any regular income taxes are payable – Alberta|
(Caution: AMT is applicable on Eligible dividends)
|$21,541||$74,667 (AMT applies)|
Income Sprinkling and Tax on Split Income
When a corporation’s dividends are issued to family members of the shareholders to shift the income from the individual with the higher marginal tax rate to the individual(s) with the lower marginal tax rate, Tax on Split Income (TOSI) is also applicable with some exceptions available. Read more about TOSI rules here.
TOSI rules are very complex and you should always consult a professional corporate accountant or certified individual tax preparation professional.
There are deemed-dividend rules applicable to corporations as well. Though there is no tax on the withdrawal of contributed capital, drawing distributions in excess of contributions can cause deemed dividend rules to be applicable. Deemed dividend rules are slightly complex rules and such a situation must be discussed with a professional tax accountant who specializes in corporation income tax in Canada.
The above post is written for general information purposes and every individual has a unique financial and tax situation. Readers are advised to contact their accountant to discuss their specific situation.
Maroof HS CPA Professional Corporation is an Ontario-based professional accounting firm providing business, accounting and tax services in Canada and the United States. We provide corporate income tax return preparation, corporate tax planning and professional tax advice along with individual income tax services. Get in touch with us.
27 thoughts on “How to issue Dividend in Canada? a quick reference guide for CCPCs”
Hi, thanks for the great info. I would appreciate if you can answer this one question. I am an incorporated consultant that currently only pays himself dividends. This will be my last year working so the corporation will have no money coming in starting next year. Could I continue to pay myself the dividends from the retained earnings? Are there any restrictions that I should know about? Thanks
Generally, If you have retained earnings, you can pay dividends.
I have a question about a building I sold the corporation is still active. How would I proceed with not having so much Capital gain? We have to pay about 42k each.
There are many things involved. You should contact your accountant about this.
Hi great article! In terms of negative retained earnings, is this accounting or tax (CRA filings) retained earnings? In other words, do I need to have zero carryforward losses for tax purposes before I can declare dividends?
I am not sure what you meant here. Do you mean that your accounting profits are different than your tax basis profits?
The tax treatment of your dividends will be different in case of accounting vs tax basis.
I’d recommend to let your accountant have look at both financial statements and tax return to determine how much and what kind of dividend can be issued. Any short comment from my side based on an extremely limited information from you can have an undesirable tax consequence.
I incorporated my business on Dec 24th, 2021 with no income for 2021. Can I pay dividends in 2022 to my wife who is a shareholder?
If there is no income, how can you pay dividends?
I am a consultant with a corporated business. I paid myself 8000k dividend, not sure how to complete schedule 3. I can’t find a spot to put where a dividend was paid to a shareholder, I only find where dividends paid to other connected corporations. So confused. This is the first time I have taken any money from my company after 3 years, just not sure how to report it. I know how to issue a T5.
Brian, you should let some accountant do your T2 this time. For T2/S3 it depends whether you issued eligible or other than eligible dividend. From your message, it looks like it’s other than eligible. Use line 450 on S3. You, however, should consult an accountant knowing the tax situation specifically for your business. It’s okay to hire a tax preparer or an accountant for corporate tax returns, the fee paid to them is generally worth that.
My wife has sold her business as an ‘asset sale’ with proceeds going into the corporation of which she is sole shareholder. Can she draw down the proceeds of asset sale by paying herself dividends?
Excelent article, thank you. I have a BC incorporated consulting business and I am thinking of selling shares in it. At the time of sale can I guarantee a specific yearly dividend – ie $10,000 per share per year for a specified number of years?
Hello Victor, you must consult both a lawyer and a tax accountant to structure this.
My CCPC generates only passive rental income from a commercial property. Retained earnings are paid out as non-eligible dividends which results in a 46 % tax owing after paying the personal taxes and getting the dividend tax refund . I carry out all the maintenance work and property management tasks myself with the help of my wife and was considering paying out all the retained earnings as salaries to both directors, resulting in zero retained earnings. This approach will slightly lower the overall taxes owing to CRA. Is this acceptable by CRA or is there a limit on the amount of salary paid to operator/directors ? Does the ITA provide clarification on this subject ?
There is no restriction that you cannot hire employees for specified investment businesses. Your corporation can hire you if you provide services. Please do not consider it as tax advice, you should check with your accountant.
In short, on S7 you report “net rental income”. Salaries and wages, amongst others, are deductions available if that is for rental operations. Also, your corporate tax rate assumption might not be very accurate. You must consult your accountant as there seems to be some problem. When you pay out eligible dividends, you do get a dividend refund. Also, eligible dividends have better credits on personal tax returns.
I’m in Ontario and have a holdco in which the only remaining asset is a universal life policy, which has a surrender value of $329,000 and Adjusted Cost Basis of $185,000. I believe that the basic amount of tax would be about $28,000 but heard that the holdco would also have to pay something called a “refundable tax”. Could tell me what that is and how it gets refunded? Thanks,
Hi Brian, this is something you should not attempt to discover through an internet search. When you say “something like…” you should get back to your corporate tax accountant and let him look into both assets and associated reporting. Any comment from me might be misleading here.
Thank you for your website.
I am the only shareholder of my Ontario CCPC. I would like my corporation to pay
me $8,000 in eligible dividends at year end. What should the resolution to issue dividends
contain? Do you know where I can get a blank form or template for this resolution?
Hope you can help. Thanks.
Hello John, you should be able to find the one in the corporate minutes kit provided by your lawyer at the time of incorporation. If you are trying to issue an eligible dividend from a CCPC, I recommend asking your accountant for the same. If you are trying to do your own taxes, you should make sure that you have a GRIP balance.
Thanks for the great content, very informative. A question if I may. The fiscal year for my CCPC starts on August 1 and ends the following year on July 31. When filing the T5 with CRA would one need to calculate all dividends paid out for the given calendar year? i.e. all dividends paid between January to December 2022, regardless of the fiscal year?
Yes, Eddy, you are correct. T5s are issued for dividends paid in a Calendar year.
Hello Maroof. According to the Articles of Incorporation of my CCPC I am the only holder of Class A Shares (common shares) and I am its sole Officer/Director. My wife (not active in the company) is the sole owner of Class B Shares, under which she can receive dividends, when I so decide, and receive the remaining assets upon Liquidation, Dissolution or Winding Up. I issued a dividend to her for fiscal year 2022. I told my tax preparer to issue the appropriate T slip (I assume it would be a T5 and Box 10). I am 72, she is 63. The question: Would the tax payable by my wife be at the highest income tax rate per the Tax On Split Income (TOSI) rules (54+%), or at her marginal tax rate? Thanks.
hi Paul, this is a very specific tax question. the best person to answer this is your tax preparer as she must knows the books in greater lengths. I believe you are talking about TOSI implications. You might want to check with the accountant if the shares were ‘excluded shares’. It appears that you are good at online research, there is a detailed guidance available on CRA’s website. Please look for excluded shares and reasonable return.
i am the only share holder. i took dividend before company year end and filed T5 to CRA . My company year end in oct 2023. Its first year. My company opend in sep 2022.
T5s are generally filed in Jan and Feb for the previous calendar year, regardless of fiscal year end of corporation. However, in certain cases this time frame is changed such as dissolution of corporation and distribution of liquidating dividends etc.
I have incorporated a business back in june 2022 and pay myself dividends. I plan to set my year end date as December 31 but haven’t done coporate tax yet. Would I need to get T5 done before the end of this February?
T5 must be filed on or before last day of February. I hope you did so.