Before it can declare and pay a dividend in cash to its shareholders, the corporation must ensure that it has the financial capacity to pay such a dividend according to the criteria established by applicable provincial and federal corporate laws.
Indeed, the Quebec Business Corporations Act specifies that a corporation may not declare or pay a dividend if there are reasonable grounds to believe that it cannot, or would be unable to, thereby pay its liabilities as they become due. However, this statutory criterion does not apply to a dividend declared and paid in shares or in option or purchase rights relating to shares of its share capital.
For its part, the Canada Business Corporations Act establishes that a corporation may not declare or pay a dividend if there are reasonable grounds to believe that: a) it cannot, or would therefore be unable to, pay its liabilities as they become due; or b) the realizable value of its assets would, as a result, be less than the total of its liabilities and its declared capital.
With regard to dividends paid in kind , the company must also consider the financial capacity criteria stipulated by its governing law. The fact that the dividend is paid using company assets rather than cash does not, in itself, exempt it from the financial requirements applicable to the declaration and payment of the dividend.
In the case of a dividend paid in shares of the company , the rules are different. In Quebec, the criterion relating to the company's ability to pay its liabilities as they fall due does not apply to a dividend paid in shares or in stock option or acquisition rights. At the federal level, the Canada Business Corporations Act also allows for the payment of a dividend in the form of fully paid-up shares of the company.