What is a discretionary dividend?

Certain share capital structures can include discretionary dividends.

The discretionary dividend has often been regarded as an "invention" of taxation experts in order to favor certain shareholders.

Shareholders holding shares with a discretionary dividend are entitled to receive, in priority to shareholders of all other classes of shares, a dividend not fixed in advance and non-cumulative, calculated on the amount paid for these shares in the subdivision of the issued and paid-up share capital account (for the jurisdiction of Quebec) or stated capital account (for the federal jurisdiction) related to shares of that class, the rate and amount of the dividend, the time of declaration and payment being then left to the sole discretion of the board of directors of the business corporation.

The board of directors can so declare, in its discretion, dividends on shares of that class having a discretionary dividend for amounts that are different from the amounts of dividends declared on all other classes of shares of the business corporation.

The board of directors of the business corporation can, in its sole discretion, declare dividends on shares of that class having a discretionary dividend without declaring dividends on one or more of the other classes of shares or still, can allocate an entire dividend to shares of that class, to the exclusion of all other classes, just as it can also not declare a dividend on shares of that class having a discretionary dividend but rather declare a dividend on shares of other classes according to the rights, ranks and priorities established for these other classes.

Some legal experts are reluctant to advocate the use of discretionary dividends as they see it as a possibility to favor shareholders who hold this type of shares compared with other shareholders.