IT SUBJECT: INCOME TAX ACT Taxable Dividends from Corporations Resident in Canada
No: IT-67R3 DATE: May 15, 1992
REFERENCE: Paragraph 12(1)(j) (also sections 82, 83, 84, 84.1 and 121; subsections 153(4), 260(5); the definition of “dividend”, “stock dividend” and “dividend rental arrangement” in subsection 248(1); and paragraph 89(1)(j))
Application
This bulletin replaces and cancels Interpretation Bulletin IT-67R2 dated July 19, 1983. Current revisions are designated by vertical lines.
Summary
This bulletin discusses the tax implications of receiving a taxable dividend from a corporation resident in Canada. It comments on the meaning for tax purposes of the word “dividend” and the term “taxable dividend”. The treatment of dividends paid out of a capital dividend account and the valuation of a “dividend in kind” are discussed. The bulletin notes that a stock split is not a stock dividend. It also explains the related “gross-up” and “dividend tax credit” provisions of the Act applicable to certain dividends received by individuals from taxable Canadian corporations and comments on certain deeming provisions of the Act as well as special rules in the Act relating to particular types of dividends.
Discussion and Interpretation
1. The word “dividend” is not specifically defined in the Act except to the extent that subsection 248(1) provides that a dividend includes a stock dividend. A “stock dividend” is defined in subsection 248(1) to include any dividend paid by a corporation to the extent that it is paid by the issuance of shares of any class of the capital stock of the payer corporation. As noted in 7 below, a stock split is not a stock dividend.
2. Because there is no specific meaning given to the word “dividend” in the Act, it must be given its generally accepted meaning. Accordingly, any distribution by a corporation of its income or capital gains made pro rata among its shareholders may properly be described as a dividend unless the corporation can show that it is another type of payment. The fact that a distribution of this kind may not be called a dividend does not affect the nature of the distribution. Any interest received on an income bond is deemed under subsection 15(3) to be a dividend where the payer corporation is not entitled to deduct such payment in computing its income. Where an amount is transferred from an unclaimed dividend account of a corporate broker or dealer in securities to a capital or surplus account and is subsequently distributed to the company’s shareholders, the shareholders are in receipt of a taxable dividend.
3. Under the Act, the only dividends received from corporations resident in Canada that are included in income are those classified as taxable dividends. Under the definition in paragraph 89(1)(j), a “taxable dividend” is a dividend other than:
(a) a dividend for which the corporation paying the dividend has elected under
(i) subsection 83(1) as it read prior to 1979, or
(ii) subsection 83(2), and
(b) a qualifying dividend paid to shareholders of a prescribed class of tax-deferred preferred shares of certain public corporations that are listed in section 2107 of the Regulations.
4. The election provisions of subsection 83(2) concern the tax treatment of dividends paid out as capital dividends. Generally, a dividend in respect of which a subsection 83(2) election is made is a capital dividend no part of which is required to be included in the shareholder’s income. However, notwithstanding that a subsection 83(2) election has been made, subsection 83(2.1) may apply to deem the dividend to be received by the shareholder as a taxable dividend to be included in income. Subsections 83(2) and 83(2.1) are discussed in the current versions of IT-66 Capital Dividends and Life Insurance Capital Dividends, IT-146 Shares Entitling Shareholders to Choose Taxable or Other Kinds of Dividends and IT-149 Winding-up Dividend.
5. The current version of IT-269 Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation comments on the tax levied under section 186 on taxable dividends received by corporations resident in Canada that are eligible for a deduction under section 112 or 113.
6. The value to be placed on a dividend, other than a stock dividend, paid by a corporation in assets other than cash (a “dividend in kind”) is the fair market value of such assets at the date of payment or transfer to the shareholders, regardless of whether such value is above or below the cost or other book value of the assets as shown in the records of the company. For the purposes of the capital gains provisions of the Act, this same value will be deemed to be the cost of such assets for determining any taxable capital gain or allowable capital loss when the asset is subsequently disposed of by the shareholder. Where a credit to a shareholder’s account or a reduction of a shareholder’s debt constitutes the payment of a dividend, the amount received by the shareholder as a dividend is equal to the amount so credited or by which the debt is so reduced, whichever is the case. Whether or not such action constitutes the payment of a dividend is discussed in the current version of IT-243 Dividend Refund to Private Corporations.
7. The treatment of stock dividends is discussed in the current version of IT-88 Stock Dividends. As noted in that bulletin, a stock split is not a stock dividend and the distinguishing features of each of those terms are discussed therein. The tax implications of a stock split are discussed in the current version of IT-65 Stock Splits and Consolidations.
8. Generally, the recipient of a taxable dividend paid by a corporation resident in Canada must include the amount received in income, as provided under subsection 82(1). In addition, an individual (other than a trust that is a registered charity) must add 1/4 of the amount so included to the extent it represents dividends from a taxable Canadian corporation. This addition is referred to in this bulletin as a “gross-up”. These comments apply to taxable dividends whether they are received in cash, in kind or as stock dividends.
However, the tax treatment of dividends received by an individual from a corporation resident in Canada as described above, will differ in cases where there is a securities lending arrangement or dividend rental arrangement. Where dividends are received by an individual from a taxable Canadian corporation, the amount received is reduced by any payment made by the individual that is deemed by subsection 260(5) to have been received by another person as a taxable dividend and only the net amount is included in the individual’s income. The gross-up will be calculated on that net amount. The deemed dividend under subsection 260(5) relates to compensatory dividend payments made after May 31, 1989 for taxable dividends paid on shares of a Canadian public corporation under a securities lending arrangement. If a dividend is received as part of a dividend rental arrangement, the dividend is included in income but there is no gross-up for that dividend. A dividend rental arrangement referred to above may generally be described as any arrangement the main reason for which is to enable a person to receive a dividend on a share of a taxable corporation acquired after April 30, 1989, in circumstances where any increase or decrease in the value of the share accrues to someone other than that person.
9. An individual may deduct as a tax credit under section 121 an amount equal to 2/3 of the gross-up referred to in 8 above. A further tax credit is effectively allowed by the provinces as illustrated in 15 below. The combined federal and provincial tax credit is approximately 25% of the actual dividends received that are required to be “grossed up”, varying from province to province. As Quebec collects its own provincial income tax, dividends received by a person resident in that province are taxable as set out in the Quebec law.
10. For taxable dividends received in 1987, the fraction 2/3 set out in 9 above is applicable but the fraction 1/4 set out in 8 above should be read as 1/3. For taxable dividends received from 1978 to 1986, the fraction 1/4 set out in 8 above should be read as 1/2. The fraction 2/3 in paragraph 9 above for the years 1982 to 1986 should be read as 68%. For the rates in effect in years not mentioned refer to the applicable law.
11. Where a dividend received by some other person is included in a taxpayer’s income under
(a) subsection 56(4),
(b) subsection 56(4.1) for dividends received after June 18, 1987, or
(c) sections 74 to section 75,
subsection 82(2) provides that the dividend is deemed to have been received by the taxpayer for the purposes of the Act. This provision is commented on in the current versions of IT-440 Transfer of Rights to Income, IT-510 Transfer and Loans of Property made after May 22, 1985 to a Related Minor and IT-511 Interspousal Transfers and Loans of Property made after May 22, 1985.
12. In certain situations, a taxpayer may make an election under subsection 82(3) the effect of which is that a dividend received by the taxpayer’s spouse is deemed to have been received by the taxpayer and not by the taxpayer’s spouse. This elective provision is discussed in the current version of IT-295 Taxable Dividends Received by a Spouse.
13. Since a trust is taxed as an individual, any taxable dividends received by a trust (except a registered charity) which is resident in Canada throughout the year from taxable Canadian corporations are subject to the gross-up and the trust is eligible for the dividend tax credit unless, as a result of a designation by the trust under subsection 104(19), such dividends are deemed to be received by a beneficiary. Subsection 104(19) permits such a designation by a trust that was resident in Canada throughout a taxation year to the extent that the taxable dividends received by it in the year may reasonably be considered under the circumstances (including terms and conditions of the trust arrangement) to have been included in the income of a beneficiary for the year. If so, and the beneficiary is an individual (other than a trust that is a registered charity) resident in Canada, the individual rather than the trust must include in income the amount of the deemed dividend plus the gross-up and the individual is eligible for the dividend tax credit. The current version of IT-372 Trusts – Flow Through of Taxable Dividends and Interest to a Beneficiary comments on the subsection 104(19) designation.
14. It should be noted that the gross-up and credit are based on the amount of the dividend received (i.e., before deducting any carrying charges). T5 information slips contain the applicable information on the gross-up and the tax credit.
15. The following example illustrates the taxation of a taxable dividend received after 1987 by an individual who has a federal marginal tax rate of 26% and who resides in a province (other than Quebec) where the provincial tax rate is 50%.
Income
Dividend received $ 800.00
Add: Gross-up (1/4) 200.00
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Taxable Dividend $1,000.00
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Tax Calculation
Federal income tax
(marginal rate 26%) $ 260.00
Less: Dividend tax credit
2/3 of $200. 133.33
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Federal tax payable 126.67
Provincial tax 50% of $126.67 63.33
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Total tax payable $ 190.00
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Effective Dividend Tax Credit
(25% of the dividend received)
Federal tax credit $ 133.33
Reduction of provincial
tax as a result of
federal tax credit -
50% of $133.33 66.67
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$ 200.00
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16. There are certain special rules contained in the Act regarding the taxation of:
(a) capital gains dividends paid by investment corporations, mortgage investment corporations and mutual fund corporations respectively under sections 130, 130.1 and 131,
(b) dividends from non-resident owned investment corporations under section 133,
(c) patronage dividends (see the current version of IT-362 Patronage Dividends) under section 135,
(d) certain dividends paid by life insurance corporations (see the current version of IT-87 Policyholders’ Income from Life Insurance Policies) under section 148, and
(e) unclaimed dividends (see the current version of Information Circular 71-9 Unclaimed Dividends) under subsection 153(4).
17. The foregoing comments refer to pro rata distributions made in cash, in kind, or by means of a stock dividend by a corporation in the ordinary course of its business. Where a corporation increases or reduces its paid-up capital or makes a distribution on the winding-up of the corporation as specified in section 84, a taxable dividend may be deemed to have been received by the shareholder in accordance with the provisions of that section. Also, a taxable dividend may be deemed under section 84.1 to have been paid to a shareholder (other than a corporation) resident in Canada where the shareholder disposes of shares of a corporation resident in Canada to another corporation with which the shareholder does not deal at arm’s length and, immediately after the disposition, the two corporations are connected within the meaning assigned by subsection 186(4). The provisions of section 84.1 are discussed in the current version of IT-489 Non-Arm’s Length Sale of Shares to a Corporation.