Dividends are payments declared by the directors of a company which are paid to the shareholders (owners) of a private or public company out of the profits of that company. When declaring a dividend the dividend must be declared equally to all shareholders of a class of shares and are paid out to each shareholder in proportion to the number of shares held.
When declaring a dividend, dividends can be paid as money, shares, warrants or property.
The directors of a company will pass a resolution at a meeting of the directors or by a resolution signed by all of the directors declaring a dividend to the shareholders of a specific class of shares.
Example of a Dividend Calculation
Below is an example of how a dividend is calculated and declared:
- Declaring a Dividend in the aggregate amount of $10,000
- The company has 2 shareholders with 100 issued and outstanding shares.
- Shareholder #1 owns 40 shares. Shareholder #2 owns 60 shares.
- Shareholder #1 will receive $4,000 in dividend profits
- Shareholder #2 will receive $6,000 in dividend profits
- The dividend per share is equal to $100
Relevant Dates When Declaring a Dividend
- The date the dividend is being declared payable. Dividends cannot be declared payable in the past and this date must be either the same date of the resolution approving the dividend or for a future date.
- The date upon which the shareholders of record is determined. This provision comes into play more for public companies since shares for those companies regularly trade and the number of shareholders changes from day to day however even private companies must follow the same rules. A record date must be determined when declaring a dividend and the only shareholders who would receive the dividend would be those who were shareholders of record on that particular date. This prevents a shareholder who held shares in the company prior to the declaration of the dividend having a right to a dividend declared after he or she is no longer a shareholder.
- The date of the directors resolution approving the dividend. Frequently resolutions are left undated but it is very important when declaring a dividend to include the actual date the resolution was approved so that it is very clear that the dividend is being declared for a current or future date.
Which Classes of Shares are Eligible for Dividends
Common shares have the automatic right to receive dividends, however, preference or special classes of shares are only entitled to receive dividends if the Articles of the Corporation provide for it. As well, there may be certain terms outlined in the Articles to be considered when declaring a dividend on special or preference shares.
Statutes Governing the Declaration of Dividends in Canada
Income Tax Act (Canada) deals with dividends in several different sections and it is a good idea to discuss dividends with your accountant before declaring them since there are tax consequences upon declaration of a dividend.
Approval for declaring a dividend is governed by the companies act or corporations act in each individual province or territory of Canada. The various corporation statutes across Canada will provide either some or all of the following provisions:
A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that (a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.
A corporation may pay a dividend by issuing fully paid shares of the corporation and a corporation may pay a dividend in money or property.
If shares of a corporation are issued in payment of a dividend, the declared amount of the dividend stated as an amount of money shall be added to the stated capital account maintained or to be maintained for the shares of the class or series issued in payment of the dividend.
Solvency Test When Declaring a Dividend
Most statutes will have a solvency test that must be met before any dividend is issued. The company must not be insolvent and a dividend must not be declared if it would render the company insolvent thereafter.
Resolutions to Approve a Dividend
Example of a Resolution to Approve a Regular Dividend for Money:
“BE IT RESOLVED THAT a dividend in the aggregate amount of $** payable to the holder(s) of the issued and outstanding [common] shares in the capital of the Corporation is declared payable on [declaration date] to the shareholders of record of the Corporation as of [record date].
Any director and/or officer of the Corporation be and is hereby authorized and directed from time to time to execute and deliver all documents, agreements or other writings, whether under the corporate seal of the Corporation or otherwise, as may be necessary or advisable, and to sign for and in the name on behalf of the Corporation all such documents and writings and to take all such steps as in his or her opinion may be necessary or advisable for the purpose of giving effect to the foregoing.”
Certificates of Status for Canadian Companies
Example of a Resolution to Approve a Dividend for Property:
“BE IT RESOLVED THAT a dividend in the form of [described property] now registered in the name of the Corporation (the “Property”) is declared payable to the holder(s) of the issued and outstanding [common] shares in the capital of the Corporation.
Payment of the dividend shall be effected by transferring the Property now registered in the name of the Corporation to the holder(s) of the issued and outstanding [common] shares in the capital of the Corporation on [declaration date] to the shareholders of record of the Corporation as of [record date].
The amount of the dividend shall be equal to the fair market value of the Property, which is [$500,000].
Any director or officer of the Corporation is authorized and directed to do all things and executed all instruments and documents necessary or desirable to carry out the foregoing.”
Example of a Resolution to Approve a Dividend for Shares:
“BE IT RESOLVED THAT a dividend in the aggregate amount of $1,000 is hereby payable to the holder(s) of the issued and outstanding [common] shares in the capital of the Corporation on [declaration date] to the shareholders of record of the Corporation as of [record date], such dividend to be paid and satisfied in full by the issuance to such holder(s) of the aggregate amount of [500] fully paid and non-assessable common shares.
The directors of the Corporation hereby determine that there shall be added to the stated capital account maintained for the [common] shares of the Corporation the amount of $1,000 in respect of the [500 common] shares of the Corporation issued in payment of the dividend declared.
Any one of the directors or officers is authorized and directed to do all things and execute any agreements or documents in order to effect the foregoing including the issuance of a certificate or certificates representing the [500 common] shares to the holders(s) of [common] shares of the Corporation.’
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Capital Dividends
These dividends are a different type of dividend and the rules are different. This article is with respect to regular dividends only. For more information about these dividends refer to Capital Dividend.
Buy Dividend Resolutions
If you wish to make things easy refer to this link for a number of templates that can be purchased relating to Approving Dividends Templates.
For more information about dividends refer to:
