STOCK DIVIDENDS
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A stock dividend is a dividend paid by the issuance of shares of the capital stock of the payer corporation.
The term "stock dividend" is defined as including 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 set out in subsection 248(1) of the Income Tax Act. A dividend which is paid in the form of shares of another corporation is a dividend "in kind" and not a stock dividend for income tax purposes, as explained in Revenue Canada’s Interpretation Bulletin IT-67, Taxable Dividends from Canadian Resident Corporations.
A stock dividend also needs to be distinguished from a stock split. With a stock split, there is an increase in the number of shares accompanied by a proportional decrease in the legal paid-up capital per share so that neither the total amount of legal paid-up capital nor the total amount of surplus available for distribution as a dividend is altered. With a stock dividend, there is a distribution of shares accompanied by a capitalization of retained earnings or any other surplus account available for distribution as a dividend. The differences as between stock splits and stock dividends, and their distinct tax implications, is set out in Revenue Canada’s Interpretation Bulletin IT-65, Stock Splits and Consolidations.
Variances in corporate laws of different jurisdictions can impact whether or not the acquisition of previously issued shares in its capital stock, without cancelling them or restoring them to authorized but unissued shares, and to subsequently resell such shares, constitutes a stock dividend. The rules governing the cost of shares received as a stock dividend and the amount of a stock dividend are set out at subsections 52(3) and 95(7) of the Income Tax Act and in paragraph (c) of the definition of "amount" in subsection 248(1).
For stock dividends received from a Canadian corporation, the amount of a stock dividend is taxed in the same manner as an ordinary taxable dividend. As such, pursuant to subsection 52(3) of the Income Tax Act, the recipient of a stock dividend is deemed to have acquired the shares at a cost equal to the aggregate of:
(a) the amount of the stock dividend, and
(b) where an amount is included in the shareholder's income in respect of the stock dividend under subsection 15(1.1), the amount so included.
Stock dividends from non-resident corporations and foreign affiliates have different tax implications, as noted in Revenue Canada’ s Interpretation Bulletin IT-88R2, which also describes other aspects and variances related to stock dividends.
For corporate tax matters and advanced tax planning, including optimizing legitimate tax planning strategies to get the most from your business, contact our law firm to schedule a confidential initial consultation at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
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