Skip to content

What is a Dividend Resolution in Canada?

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.

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.

Looking to simplify your small business’s legal documents? Learn how Ownr can easily create customized legal agreements, including Dividend Resolutions, and store them securely in your Ownr dashboard.See details here

Why is it 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.

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.

What is a Stability Corporate Dividend?

The Stability Corporate Dividend policy (also called a Smooth Dividend) is the structure wherein a company pays out regular dividends at expected intervals. These intervals, which may be annually, bi-annually or quarterly, are distributed regardless of fluctuations in the market. Per its name, they serve to provide shareholders with a stable source of income. 

Even if the company does not turn a profit, the dividend will continue to be paid to shareholders. This policy aims to reflect longer term growth (ie. annual earnings) over quarterly fluctuations, reducing instability in the market. A Stability Dividend Policy is the easiest to set up, and also the most common. 

What is a Residual Corporate Dividend?

A Residual Corporate Dividend policy is a structure for a company to pay off their capital expenditures and working capital before using any of the remaining profits to pay dividends to shareholders. The company will have no excess cash profits as it will either be reinvested in the business or paid out to shareholders. 

A Residual Dividend policy allows the company to prioritize business operations, maximize growth and invest in the development of the business. This dividend structure focuses on long-term capital gains rather than immediate shareholder cash payouts and is typically used by companies with higher risk tolerance.

What is a Constant Corporate Dividend? 

This policy is when a company pays its shareholders a percentage of its earnings. It is the least stable type of dividend policy because it means shareholders will experience the full volatility of the market; earning more in boom years and potentially receiving no dividends during lower sale periods. For this reason, it is not used as frequently as residual corporate dividend policies and stability corporate policies.

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. 

Learn more about how Ownr can help streamline and simplify Dividend Resolutions customisable legal document templates. See more here

Who is eligible to receive dividends?

Shareholders who own company stock are eligible to receive dividends. But there are a few criteria that must be met:

  • Ex-dividend date: The shareholder must have owned the shares on the ex-dividend date (also known as a reinvestment date), which is the day the stock trades—usually one business day before the recorded date. 
  • Share class: If a company has multiple classes of dividends, eligibility will depend on which particular share is owned by the shareholder, and if that share class is being paid dividends.
  • Minimum share ownership: The company may have its own requirements for the minimum amount of stock shares a shareholder holds before receiving dividends.
  • Length of time that shares have been held: Similarly, the company may have its own criteria for how long the shareholder has possessed stocks before receiving dividends.

Dividend Resolution FAQs

Do you need a resolution for dividends?

A Dividend Resolution is required every time a company pays out dividends to its shareholders. 

How do you write a Dividend Resolution?

A Dividend Resolution is a formal legal document that can be drafted using a template to suit your company’s needs. Simplify the process with Ownr’s legal document templates hereGet started with Ownr’s legal document templates.

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.