In both Quebec and Canada, a company may declare and pay a stock dividend to its shareholders even if it does not have the legal capacity to pay a cash dividend under applicable corporate laws, since this does not involve any outflow of funds for the company.
A stock dividend is a dividend paid through the issuance of new shares (i.e., treasury shares) that are fully paid and issued from the company’s capital stock, and it is this issuance of shares that serves to pay the dividend; shareholders thus receive a certain number of additional shares based on the number of shares they already hold in the corporation. The shares received by a shareholder as a stock dividend may be of the same class as that shareholder already owns and on which a stock dividend is declared, or they may be of any other class of shares comprising the company’s share capital, as determined by its board of directors.
In the jurisdiction of Quebec, a stock dividend consists of fully paid-up shares that the corporation issues as a declared and paid dividend, or of option or subscription rights relating to such shares.
Furthermore, when a corporation in the jurisdiction of Quebec pays a stock dividend, it credits the issued and paid-in capital account of the appropriate class all or part of the monetary value of those shares; in the case of a corporation under federal jurisdiction, the declared monetary amount of dividends paid in shares is credited to the relevant declared capital account.
Therefore, in both Canada and Quebec, a stock dividend is paid in the form of new shares of the corporation, without any cash flow, but it remains fully taxable for the shareholder who receives it; in fact, stock dividends are taxable at the time of their sale, unlike cash dividends, which are taxable upon their distribution.
The “amount” of a stock dividend is usually an amount equal to the increase in the corporation’s paid-in capital resulting from the payment of the dividend—that is, at the time the new shares are issued—and not at their future market value. This “amount” is added to a shareholder as an ordinary taxable dividend and is subject to the same provisions regarding gross-up and the dividend tax credit. In addition, this same paid-in capital becomes the shareholder’s adjusted cost base (ACB) and will be deducted from the sale price upon a future sale to calculate the actual capital gain. Thus, shares received as a result of a stock dividend are deemed to have been acquired at a cost equal to the “amount ” of the stock dividend.
However, a dividend paid by a corporation in the form of shares of another
corporation
constitutes a dividend paid in kind
property and not a stock dividend for
income tax purposes.
A stock dividend offers greater flexibility to shareholders, as they can then decide when they will pay tax. It is also advantageous for corporations that have less cash on hand but still wish to distribute dividends.
Stock dividends are most commonly used in specific contexts such as estate planning, , share capital reorganization, or the entry of a new shareholder. The stock dividend serves primarily as a planning tool for the company, rather than as a form of current compensation, since it does not draw on the company’s cash reserves.
It is always advisable to consult a tax specialist or an accountant regarding such dividend declarations.