A dividend is a payment of the corporation’s profits to its shareholders. Corporate statutes give the decision to the directors, and they make it by resolution: at a meeting or, in most small corporations, in a written resolution every director signs.
The resolution is the legal record that the dividend was properly declared. Your accountant needs it to prepare the tax slips, and the tax authorities may ask for it if they question whether a payment was really a dividend, a salary or a loan.
- Approved by
- The directors, unless the articles or a unanimous shareholder agreement say otherwise
- Signed by
- Every director entitled to vote, if passed in writing
- Test to pass first
- The corporation must still be able to pay its debts as they come due
- Filed with the government
- No
- Follows
- T5 slips (and RL-3 in Quebec) in Canada; Form 1099-DIV for US C corporations
When you need one
- You are paying yourself or other shareholders out of the corporation’s profits, rather than as salary.
- A holding company is moving cash up from its operating company. A dividend between related companies needs a resolution of the paying company’s board like any other.
- You are paying a dividend in shares instead of cash (a stock dividend).
- Your accountant recommends a year-end dividend, or a capital dividend in Canada, which needs an extra election.
- A US S corporation is making a distribution. State law still has the board authorize it, even though the tax rules treat it differently from a dividend.
Who approves it
Every statute gives the directors the power to declare dividends and sets a financial test the corporation must pass first. Directors who approve a dividend that fails the test can be personally liable to repay it, so the resolution should show they checked.
| Jurisdiction | Rule |
|---|---|
| Canada, federal (CBCA) | No dividend if there are reasonable grounds to believe the corporation is, or would after paying it be, unable to pay its liabilities as they become due, or that its assets would be worth less than its liabilities plus the stated capital of all classes (s. 42). The directors can’t delegate the decision (s. 115(3)(d)) and are liable for an improper dividend (s. 118(2)(c)). |
| Ontario (OBCA) | The directors declare, subject to the articles and any unanimous shareholder agreement (s. 38(1)), using the same two-part test (s. 38(3)). Liability under s. 130(2)(d). |
| British Columbia (BCBCA) | A company may declare a dividend (s. 70(1)), usually by the directors under its articles. A dividend in money or property is barred only if the company is insolvent or would be made insolvent, a cash-flow test (s. 70(2)). Liability under s. 154(1)(c). |
| Alberta (ABCA) | The same two-part test as the federal statute (s. 43). Liability under s. 118(3)(c). |
| Quebec (QBCA) | The board declares, unless the articles or a unanimous shareholder agreement say otherwise (s. 103). The test is cash-flow only: no dividend if the corporation is, or would be, unable to pay its liabilities as they become due (s. 104). Liability under s. 156(4). |
| Delaware (DGCL) | Dividends may be paid out of surplus or, if there is none, out of net profits for the current or preceding fiscal year (s. 170(a)). Directors who wilfully or negligently pay an unlawful dividend are liable for six years (s. 174). |
| Model Act states (MBCA) | No distribution if the corporation couldn’t pay its debts as they become due, or its assets would be less than its liabilities plus amounts owed to preferred shareholders on dissolution (s. 6.40(c)). The board may rely on financial statements (s. 6.40(d)). |
Every statute protects directors who relied in good faith on financial statements or a professional’s report (for example CBCA s. 123(4) and DGCL s. 172), which is why the resolution should record the figures the directors used.
Before you sign
- Run the solvency test with real numbers: the latest balance sheet and the cash the corporation needs for the next few months. Note what you relied on.
- Check which class of shares can be paid. Many owner-manager corporations have several classes so dividends can go to one class and not another. Your articles say what each class is entitled to, and every share of the same class must be treated alike.
- Decide the amount and the dates: the amount per share and in total, the record date (who is a shareholder on that day gets paid) and the payment date.
- Ask your accountant about the tax character: in Canada, eligible, non-eligible or a capital dividend; in the US, whether the corporation is a C or an S corporation.
- Watch for family shareholders. In Canada, dividends to a spouse or adult children who aren’t active in the business can be taxed at the top rate under the tax on split income.
The tax side
- Canada, eligible dividends. A corporation designates a dividend as eligible by notifying the shareholders in writing when it pays it (s. 89(14) of the Income Tax Act). The CRA accepts a note in the minutes as notice when all the shareholders are directors.
- Canada, capital dividends. A tax-free capital dividend needs an election on Form T2054, filed by the earlier of the day the dividend becomes payable and the first day any of it is paid, with a certified copy of the directors’ resolution (s. 83(2); Income Tax Regulations s. 2101).
- Canada, slips. Report taxable dividends on T5 slips (and RL-3 slips in Quebec) by the last day of February of the following year. Capital dividends aren’t reported on a T5.
- US, C corporations. Report dividends of $10 or more to each shareholder on Form 1099-DIV, sent to shareholders by January 31.
- US, S corporations. Distributions are usually reported on each shareholder’s Schedule K-1, not on a 1099-DIV (unless the corporation has accumulated earnings and profits from C corporation years). All shares must carry identical rights to distributions, so pay them in proportion to shares.
Sample wording
Adapt the wording to your corporation: replace everything in square brackets, and check your articles, bylaws and any shareholder agreement first. Each person signs and dates a copy, and a scanned or electronic signature is usually fine.
Resolutions of the directors of [Corporation name] (the “Corporation”)
WHEREAS the directors have reasonable grounds to believe that, after the payment of the dividend declared below, the Corporation will be able to pay its liabilities as they become due [and the realizable value of its assets will not be less than the aggregate of its liabilities and the stated capital of all classes of its shares], based on [the financial statements for the period ended date / the balance sheet as at date];
BE IT RESOLVED THAT:
1. A dividend of $[amount] per share, for a total of $[total], is declared on the [class] shares of the Corporation, payable on [payment date] to the holders of those shares of record at the close of business on [record date].
2. The dividend is designated an eligible dividend under subsection 89(14) of the Income Tax Act (Canada), and the Corporation will notify the shareholders of the designation in writing when it is paid. [Delete if the dividend is not eligible.]
3. Any director or officer of the Corporation is authorized to do all things and sign all documents needed to pay the dividend.
The foregoing resolutions are passed by the signatures of all the directors of the Corporation, as of [date].
______________________________
[Name], director
______________________________
[Name], director
Keep the bracketed balance-sheet test for federal, Ontario and Alberta corporations. British Columbia and Quebec use the cash-flow test only.
Resolutions of the directors of [Corporation name] (the “Corporation”)
BE IT RESOLVED THAT:
1. A dividend of $[total] is declared on the [class] shares of the Corporation, payable on [payment date] to the holders of those shares of record at the close of business on [record date].
2. The Corporation elect under subsection 83(2) of the Income Tax Act (Canada) that the full amount of the dividend be a capital dividend.
3. [Name, title] is authorized to sign and file Form T2054 and a certified copy of this resolution with the Canada Revenue Agency on or before the day the dividend becomes payable.
The foregoing resolutions are passed by the signatures of all the directors of the Corporation, as of [date].
______________________________
[Name], director
______________________________
[Name], director
Action by unanimous written consent of the board of directors of [Corporation name] (the “Corporation”)
WHEREAS the board has determined, based on [the financial statements as of date], that the dividend declared below is permitted by applicable law and the Corporation’s certificate of incorporation, and that after paying it the Corporation will be able to pay its debts as they become due in the usual course of business;
RESOLVED, that a dividend of $[amount] per share, for a total of $[total], is declared on the Corporation’s [class] stock, payable on [payment date] to stockholders of record at the close of business on [record date]; and
RESOLVED FURTHER, that the officers of the Corporation are authorized to take all actions and sign all documents needed to pay the dividend.
This consent is signed by all the directors of the Corporation, is effective as of [date], and will be filed with the minutes of the proceedings of the board.
______________________________
[Name], director
______________________________
[Name], director
For an S corporation, say “distribution” instead of “dividend” and pay the same amount on every share.
After you sign
- Pay the dividend exactly as declared: the same amount on every share of the class, on the payment date, by bank transfer.
- A declared dividend is generally a debt the corporation owes the shareholders until it is paid. If payment is delayed, record it as dividends payable.
- In Canada, issue T5 slips (and RL-3 slips in Quebec) by the last day of February, and file the T2054 before a capital dividend becomes payable.
- In the US, send Form 1099-DIV to each shareholder of a C corporation by January 31.
What to keep in your minute book
- The signed resolution, filed in date order with your minutes.
- The figures the directors relied on for the solvency test: a balance sheet, or a note from your accountant.
- For a capital dividend, the filed Form T2054 and the certified copy of the resolution.
- Copies of the tax slips issued.
Common questions
Can the shareholders declare a dividend instead of the directors?
Not usually. Corporate statutes give that power to the directors. In Canada, a unanimous shareholder agreement can move it to the shareholders, who then sign the resolution instead.
Can I pay a dividend on one class of shares and not another?
Yes, if your articles allow it. Many owner-manager corporations are set up with separate classes so the directors can choose which class receives a dividend. Every share within a class must be treated the same.
Do I need a resolution for every dividend?
Yes. Each dividend should be declared by resolution before it is paid. If money was paid out first, have the directors pass a resolution confirming the dividend as soon as possible, and ask your accountant how it was recorded.
What happens if we pay a dividend the corporation couldn’t afford?
Directors who approved it can be personally liable to repay the corporation, and shareholders who received it may have to give it back. Recording the solvency check in the resolution, and the figures you relied on, is your best protection.
Is an S corporation distribution a dividend?
Under state corporate law it is a distribution the board authorizes, so approve it by resolution. For tax purposes it is usually not a dividend: it is reported on Schedule K-1 and, because every share must carry identical distribution rights, should be paid in proportion to shares.
This page is general information about corporate resolutions in the United States and Canada, not legal or tax advice. The sample wording is a starting point: your articles, bylaws and any shareholder agreement may require something different, and rules change over time. For advice about your corporation, speak with a qualified lawyer or accountant.
Sources
- Canada Business Corporations Act, sections 42, 43, 115, 118 and 123
- Ontario Business Corporations Act, sections 38 and 130
- British Columbia Business Corporations Act, sections 70 and 154
- Alberta Business Corporations Act, sections 43 and 118
- Quebec Business Corporations Act, sections 103, 104 and 156
- Delaware General Corporation Law, sections 170 to 174
- Model Business Corporation Act (American Bar Association), section 6.40
- Income Tax Act (Canada), section 89 (eligible dividends)
- Canada Revenue Agency: designation of eligible dividends
- Income Tax Act (Canada), section 83 (capital dividends)
- Income Tax Regulations, section 2101
- Canada Revenue Agency: Form T2054
- Canada Revenue Agency: T4015, T5 Guide
- Revenu Québec: RL slips
- Canada Revenue Agency: tax on split income
- IRS: Instructions for Form 1099-DIV
- IRS: Instructions for Form 1120-S
- Treasury Regulations § 1.1361-1(l), one class of stock