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Most common type is:
Cash Dividend -
Capital Dividend - dividend paid from:
Capital gain distributions (non-taxable portion)
Life Insurance proceeds
Capital Dividends from another Corporation
Dividend in Kind - any type of value transfer from a corporation to its shareholders - (if declared by the directors of the corporation)
additional stock,
specific property,
or notes payable
In a general sense, integration is the idea that the ultimate income tax rate of a particular stream of income once it reaches the hands of the individual should be approximately the same tax rate regardless of how he decides to organize his affairs.
More concretely, that means the total income tax on a particular stream of income will be the same regardless of whether it was earned directly by an individual, or earned in a corporation and then paid out to that individual as a salary or as a dividend.
However, dividends (except for dividends from the Capital Dividend Account) are paid from a corporation’s after-tax profits, meaning that the corporation would have already paid [corporate income tax] on that income.
So, if the individual then paid his full marginal tax rate on the dividend he receives, that stream of income would have been subjected to both the corporate tax as well as individual tax and thus have been subjected to double taxation.
Corporation pay different tax rates based on income earned and taxed at the:
Small Business Deduction (reduced tax rate)
Regular Rate - ( income that does not qualify for Small Business Deduction )
Manufacturing and Processing deduction
Eligible Dividends:
Corporate income note eligible for the Small Business Deduction:
Income above $500,000 that does not qualify for the SBD (Small Business Deduction)
Non-Eligible Dividends (small business dividends)
Dividends paid out of Income that was eligible for the Small Business Deduction
GRIP = General Rate Income Pool
CCPC might hold shares of a non-CCPC and receive eligible dividends from that non-CCPC, so those amounts are tracked in a special account called the General Rate Income Pool, or GRIP, and the CCPC can then pay out eligible dividends to its shareholders up to the amount of GRIP that it has.
LRIP = Low Rate Income Pool
A non-CCPC can also have shares and receive ineligible dividends from a CCPC – those amounts are tracked in another special account called the Low-Rate Income Pool, or LRIP, and the non-CCPC is restricted from issuing any eligible dividends while it has a positive LRIP balance. In order to reduce its LRIP balance, a non-CCPC must pay out ineligible dividends and once the LRIP balance is eliminated, then the non-CCPC may once again issue eligible dividends.
Additionally, the form of a dividend can vary widely. A dividend in its most basic form is simply a transfer of value from a corporation to its shareholders pursuant to a dividend declaration from the directors of the corporation.
This transfer may be in the form of cash, but may also be a dividend in kind in the form of
stock,
property, or
notes payable.
A stock dividend
is an issuance by a corporation of its stock to its shareholders.
For stock dividends, the value of the dividend is calculated by the fair market value of the stock.
For example, if an individual is issued a dividend of 1000 common shares of the corporation which are each worth a fair market value of $50, then the individual would have received a dividend worth $50,000 and the ultimate tax liability stemming from that dividend would depend on whether it was eligible or non-eligible as well as the individual’s marginal tax rate.
A property dividend is a non-cash dividend, which technically includes
stock dividends, but is more typically used to refer to distributions of
equipment,
inventory, or
real estate, but also things like
artwork or jewellery.
For the individual, the value of the dividend is similarly calculated as the fair market value, but for the corporation, the distribution of property will be a disposition and thus trigger a taxable event.
As such, the corporation will realize a gain or loss on the disposed of property calculated as the current fair market value of the property minus the corporation’s adjusted cost basis in the property.
Where a loss is being realized, this may prove to be an advantage to the corporation if the corporation is highly profitable, as the loss can be used to offset the corporation’s other gains or income.
Dividends may even come in the form of notes payable which is a promise by the corporation to pay the shareholder at a later date – a type of debt.
The note payable may accrue interest or not depending on the particulars, but this type of dividend can be useful in various types of corporate planning and corporate reorganizations.
However, it is important to keep in mind that the note payable is considered income to the individual who receives it and that individual must include the value of the note payable in his Canadian income tax return for that year.
Capital Dividends
Tax Free Dividends issued by a corporation if they have sufficient capital dividend account balance.
Capital Dividend Balance stems from capital gains realized by corporation
Only half of a capital gain is taxable while other half is non-taxable
This is achieved (nontaxable portion) by recording the non-taxable portion in the corporation’s capital dividend account and allowing the corporation to issue non-taxable capital dividends to its shareholders.
and other non taxable amounts such as life insurance proceeds and
capital dividends issued from another corporation
Can you declare a dividend and not pay it?
If you own a private corporation you can declare a dividend without having to pay it in cash. You can use the declared dividend to reduce your shareholder loan accounts or pay it by way of promissory note.