A dividend is a portion of a Company’s earnings or profit that is distributed to the shareholders. Dividends help determine the value of the Company’s shares and a history of dividend payments is often an indication to the shareholders that the Company is earning sufficient profit to support growth and share a portion of the gains to its owners. For the purposes of this article, we will limit our discussion on dividends declared and paid by private corporations incorporated in British Columbia as limited companies.

Dividends are usually determined by the Company after it has completed its Financial Year End and the Company has realized earnings after tax. However, in certain instances, a company may declare dividends throughout the year as well. It is best to consult with an accountant to determine the timing for declaring dividends as there are tax implications such as filing deadlines and tax due that may be associated with it.

In a Company, dividends are to be approved and declared by the Board of Directors in accordance with the British Columbia Business Corporations Act, Articles of the Company and the Shareholders’ Agreement, if any. The special rights and restrictions contained in the Articles, including any amendment thereof, and the conditions set in the Shareholders’ Agreement, provide the guidelines and limitations for the declaration and payment of dividends by the Company. The Articles identify the classes of shares entitled to dividends, set limits as to the extent of dividends that can be declared in a certain class of shares and provides certain conditions before the Company can declare dividends. Likewise, the Shareholders’ Agreement may further constrain the declaration of dividends by setting the period when the shareholders may start to receive dividend payment from the Company. Under the Business Corporations Act of British Columbia, a Company cannot declare or pay dividends in property when there are reasonable grounds to believe that the Company is insolvent or that payment of the dividends would render the Company insolvent. Further, when there are preferred shares issued and outstanding, the Company, within a reasonable period of time after payment of the dividends, should have the capacity to redeem all of the issued and outstanding preferred shares without rendering the Company insolvent. The directors should take these conditions into consideration prior to declaring any dividends.

Subject to the provisions of the Articles of the Company, the directors may have discretion to declare dividends on a certain type or class of share to the exclusion of the other shareholders holding different class of shares.

For example, if Class A Shares and Class B Shares have issued and outstanding shares and both are entitled to receive dividends, the directors may decide to only declare and pay dividends to the Class A shareholders with no dividends being declared or paid for the holders of Class B Shares. Thus, the dividends shall only be distributed to the holders of Class A Shares pro rata to the number of shares they own in the said class.

There are primarily two types of dividends Shareholders may receive – eligible dividends and other than eligible dividends (also known as ineligible dividends). Eligible dividends come with an enhanced dividend tax credit, which is why they are taxed more favourably than ineligible dividends. It is recommended to consult with an accountant to determine the best type of dividend the Company can declare based on the tax accounts of the Company.

With respect to payment of dividends, the Company may pay the dividends, whether out of profits, capital or otherwise. Payment can be in property, such as money, which can be payable to the Shareholders by credit to the Shareholders’ loan account, or by issuance of promissory note or by tendering cash to the shareholder. Another form of payment of dividends is by issuing new shares to the shareholder by way of stock dividends.

The declaration of dividends by the directors must be properly documented by way of a resolution signed by the directors of the Company or properly recorded in the minutes of a directors’ meeting. When preparing written consent resolutions, the resolutions would typically contain the following information: 1) the amount of dividends declared; 2) the shareholders holding the class or classes of shares entitled to received the dividends; 3) the date the dividends are to be paid; 4) the type of dividend being declared; 5) the manner how the dividends are to be paid to the shareholders; and 6) confirmation that the declaration of the dividends will not render the company insolvent and/or the Company would still have capacity to redeem the issued and outstanding preferred shares without rendering the Company insolvent. The information needed in drafting the resolution is usually provided by the accountant to the lawyer, pursuant to the instructions of the Company.

This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of corporate law at the following:

Jane Otterstrom: jane@touchstone.law

Una Kuzio: una@touchstone.law