Under subsection 83(2) of the Income Tax Act (Canada), the directors of a private Canadian corporation may pay a capital dividend to its shareholders out of the capital dividend account of the Corporation.
Capital Dividend Account
The capital dividend account records tax-free surpluses accumulated by a Canadian private company. These surpluses may be distributed free of tax in the form of capital dividends to the Canadian resident shareholders of a corporation.
Revenue Canada Election Requirement for a Declaration of a Capital Dividend
A corporation that intends to pay a capital dividend must file an election in respect of the dividend when the dividend is paid or becomes payable, although a late filing can be done only in certain circumstances.
Revenue Canada Agency Rules Respecting Capital Dividends
For more information about the Revenue Canada Agency rules around capital dividends, refer to:
Election Form and Procedure for Paying a Capital Dividend
The directors of a corporation must approve a capital dividend. This can be done by holding a validly held directors meeting or by all of the directors signing a directors resolution. Examples can be found at Ontario Directors Resolutions.
Once approved the President, or another officer, must certify that the resolution approved by the directors respecting the capital dividend is in full force and effect.
The certified copy of the resolution must be filed together with Election Form T2054. There are very specific rules around the timing of filing of the election form.
Directors Resolution to Approve a Capital Dividend
Below is an example of a directors resolution approving a capital dividend:
Below is an example of a certified copy of a directors resolution approving a capital dividend which must be annexed to Form 2054:
For more information about dividends refer to: