How do businesses decide when, and how much, profit to share with their owners?
For small business owners, shareholders or employees of a small business, the central goal is to make that company profitable and generate income for themselves. That income may come in the form of employee wages or shareholder dividends (or both).
When a small business turns a profit, the net profit, which is the money earned after deducting all operating expenses, can be reinvested in the company’s growth or paid out to shareholders through a dividend. In order to pay out dividends, the proper steps must be taken by the board of directors and the company shareholders, including completing a Dividend Resolution.
In this article, you’ll learn how dividend resolutions are created, the options companies have when declaring dividends, and why these decisions matter for growth and compliance.
What is a Dividend Resolution?
A Dividend Resolution is a formal notice by the company’s board of directors that authorizes the distribution of a portion of the company’s net profits through a dividend payout. It is essential to complete a Dividend Resolution, which can be done during a board meeting or in a formal legal document.
The Dividend Resolution should include information such as:
- The dividend amount
- How the dividend will be paid (cash, shares, property)
- Class of shares eligible for the dividend
- Relevant dates to the dividend (declaration date, ex-dividend date, record date)
A Dividend Resolution should be completed every time the company makes a dividend payment to its shareholders as it is a necessary practice to have thorough documentation each time company profits are paid.
Why is a Dividend Resolution Important for Companies?
A Dividend Resolution is important for proper bookkeeping. A company must track all payments made to shareholders for tax purposes by both the shareholder and the company.
Dividends themselves are also important because they reflect favourably on the financial status and profitability of that company, potentially making it easier to secure investors. They signal to investors strong financial health and encourage shareholder loyalty.
How Does a Dividend Resolution Differ from a Shareholder Resolution?
A dividend resolution and a shareholder resolution may sound similar, but they serve very different purposes.
A dividend resolution is a formal decision made by the board of directors that authorizes the distribution of company profits. It determines dividend payout by specifying the amount, setting a payment date, and including key details such as the record date. It ensures that profit distribution remains both compliant and aligned with company policy.
In contrast, a shareholder resolution is a corporate action. It can be approved by shareholders through a majority vote and may cover a wide range of matters, from electing directors to approving major transactions.
While dividend resolutions focus narrowly on distributing profits, shareholder resolutions shape the company’s governance and long-term direction.
Different Types of Corporate Dividend Structures in Canada
A dividend policy is a structure for how profits will be distributed through dividends. It should be determined early in the formation of a business by the board of directors depending on the company’s business goals. There are three common types of corporate dividend structures: stable, residual or constant. We’ll go over each one in detail below.
- Stability Corporate Dividend: Companies commit to paying dividends consistently over time, regardless of short-term profit changes. This approach offers shareholders steady returns and builds confidence, but it may put pressure on the company during low-profit periods.
- Residual Corporate Dividend: Dividends are declared only after the company has covered operating expenses and reinvestment needs. This ensures growth projects are prioritized, though payouts to shareholders may be irregular and less predictable.
- Constant Corporate Dividend: A fixed percentage of earnings is distributed as dividends each period. Payments fluctuate with company performance, allowing shareholders to benefit directly in profitable years but also share the risk during downturns.
Canadian Laws Governing Dividend Declarations
Dividend Declarations are governed by the Canadian Business Corporations Act (CBCA) at the federal level. It cites that a corporation may not pay dividends unless the company generates enough profit to pay its liabilities. It also states the forms in which a dividend may be paid: cash, property, or shares. The CBCA requires proper documentation of dividend payouts, including records of the payout, dates, and the board members who approved the dividends.
In addition to the CBCA, provincially registered corporations will need to adhere to the governing statutes unique to each province or territory. Learn more about incorporating your business provincially with Ownr and how we can help manage your bookkeeping and legal requirements.
Dividend Declarations are also subject to taxation under several tax laws in Canada, including:
- Federal income tax laws
- Provincial income tax laws
- Income Tax Act (ITA)
- Excise Tax Act (ETA)
The amount of taxation on a dividend will depend on the location of the business and whether or not the type of dividend is eligible:
- Eligible Dividends: Do not benefit from corporate tax rates. However, personal tax rates are lower for Eligible Dividends. In short, you’ll need to pay corporate taxes but less personal taxes on this type of dividend.
- Non-eligible Dividends: On the other hand, non-eligible dividends do benefit from corporate tax rates, but they also see higher personal tax rates. You’ll need to pay more personal taxes and less corporate taxes.
How to Declare a Dividend Resolution
To formally declare a Dividend Resolution, the board of directors should follow these steps:
- Determine company’s net profits: The company must have the ability to pass the solvency test. This means that the company must have enough funds to pay down its debts before paying out dividends.
- Receive approval from board of directors: The dividends must be considered and approved by the board of directors, either at a board meeting or through a written resolution that is signed by all directors.
- Draft and approve Dividend Resolution: Once the board has received approval, the written Dividend Resolution must be drafted and signed.
- File the Dividend Resolution: The resolution should be made available to all shareholders and properly documented for tax purposes.
- Pay shareholders: Now that the dividend is approved and the Dividend Resolution has been filed, shareholders can be paid in accordance.
Legal Considerations in Dividend Resolutions
Paying dividends may seem straightforward, but there are important legal rules behind the process. Failing to follow statutory requirements can expose directors and the company to liability, disputes among shareholders, or problems with creditors.
Legal Limitations on Dividend Payments
Before a dividend can be declared, a company must comply with corporate statutes (whether under CBCA or applicable provincial statutes such as the Ontario Business Corporations Act (OBCA)).
These laws impose limitations. For example, a dividend cannot be declared if doing so would violate the solvency tests (i.e., leave liabilities unpaid or reduce stated capital) or breach internally adopted restrictions, such as shareholder agreements or rights tied to specific classes of shares.
Requirements for Solvency and Financial Health
Canadian law requires that, before paying a dividend, a company must pass a solvency test. Under OBCA s. 38(3) (similarly CBCA), the directors must believe that, after the dividend is paid, the corporation will still be able to pay its debts as they become due, and that its assets will exceed its liabilities plus the stated capital of all share classes.
Impact of Debt Covenants and Credit Agreements
Even if a company satisfies legal and statutory solvency requirements, its ability to pay dividends may be constrained by external obligations. Debt covenants in loan or credit agreements often include negative covenants that restrict or condition dividend payments.
For instance, debt covenants may require certain financial ratios to be met or prohibit distributions if cash reserves fall below agreed thresholds. Ignoring these covenants can lead to breach of contract, penalties, or lenders demanding immediate repayment.
Simplify Your Dividend Resolution with Ownr
Managing corporate records doesn’t have to be complicated.
Ownr’s online platform streamlines the entire process, letting you generate, customize, and finalize resolutions in minutes instead of hours. With digital tools, you avoid messy paperwork and ensure everything, from shareholder approvals to record-keeping, stays compliant.
For small and medium-sized businesses, especially, that means more time growing your company and less time wrestling with legal formalities.
Explore compliant, stress-free dividend resolutions with Ownr.
Key Takeaways
- A dividend resolution is a formal decision by the board of directors that authorizes how and when profits will be distributed to shareholders.
- Companies must follow Canadian corporate law, pass solvency tests, and consider debt covenants before declaring dividends.
- Choosing the right dividend structure and maintaining proper documentation ensures compliance, financial stability, and shareholder confidence.
Dividend Resolution FAQs
Do You Need a Shareholder Resolution to Declare a Dividend?
A Shareholder Resolution is not required to declare a dividend as the board of directors approves the distribution of dividends without shareholder approval.
How Often Can a Corporation Issue Dividends?
There’s no fixed limit on how often a corporation can issue dividends. A corporation can issue dividends as often as profits and financial health allow, provided each declaration is approved by the board and meets Canadian legal requirements.
Can a Company Declare Dividends with Retained Losses?
Yes, but it’s generally not advisable. In Canada, dividends may still be declared with retained losses only if the corporation passes both solvency tests at the time of declaration and payment. Directors must confirm that debts can still be paid.
Can the Board of Directors Revoke a Declared Dividend?
Yes, but only for interim dividends that have not yet been paid. Once a final dividend is declared as payable, it becomes a debt owed to shareholders and generally cannot be revoked.
Do Sole Proprietors Need a Dividend Resolution?
No. Sole proprietors don’t require a dividend resolution since they take profits directly. However, it’s important to understand how income distributions are taxed and recorded differently from corporate dividends.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.