Under certain circumstances, and provided the Articles of the Corporation provide, the directors of a Corporation may approve a deemed capital dividend upon redemption of a class of shares.
Redemption of Shares Resulting in a Capital Dividend upon Redemption
When shares are redeemed they are cancelled and, in some cases, returned to Treasury. The Articles of a corporation set out the basis pursuant to which a class of shares can be redeemed and the amount of money those shares can be redeemed for. If the Articles do not contain any provisions for redemption, the shares cannot be redeemed.
Statute Governing Capital Dividends Upon Redemption
Section 83 of the Income Tax Act (Canada) governs the basis upon which a capital dividend can be declared . Refer to Section 83 of the Income Tax Act for more information on the legal requirements to be followed when declaring a capital dividend upon redemption.
Director Approval of a Capital Dividend Upon Redemption
The directors of a Corporation must approve a capital dividend upon redemption and a certified copy of such resolution must be filed with Revenue Canada Agency along with the election form.
Once issued shares of a corporation are redeemed, the share certificate evidencing those shares will be marked cancelled and the share register for those shares will be reduced by the number of shares redeemed.
Example of Directors Resolution Approving Capital Dividend Upon Redemption
Below is an example of a directors resolution approving a deemed capital dividend upon redemption:
Certified copy of Resolution of the Directors Approving a Capital Dividend upon the Redemption of Shares:
Many statutes will have a legal requirement which provides that a company cannot declare a dividend unless there are reasonable grounds it will be able to pay its liabilities. Below is a form of confirmation of Solvency by the President of a company upon a redemption.
For more information about dividends refer to: