In both Quebec and Canada, a corporation can declare and pay a stock dividend to its shareholders. Applicable corporate laws provide specific rules for this type of dividend, since it is paid using shares of the corporation rather than through a cash outflow. At the federal level, the Canada Business Corporations Act expressly permits the payment of a dividend in the form of fully paid-up shares, while the financial criteria applicable to cash or in-kind dividends are set out separately.
A stock dividend is a dividend paid through the issuance of new, fully paid-up or fully paid-up shares of the company's share capital, and it is this share issuance that serves to pay the dividend. Shareholders thus receive additional shares in accordance with the terms of the declared dividend and the rights attached to the shares concerned. The shares received by a shareholder as a stock dividend may be of the same class of shares as those already held by the shareholder or, where permitted by the articles of incorporation and the rights attached to the shares, of another class of shares of the company's share capital, in accordance with the terms determined by the Board of Directors.
In Quebec jurisdiction, a stock dividend may consist of fully paid-up shares that the company issues as a dividend, or of option or acquisition rights relating to such shares.
When a stock dividend is paid, the applicable corporate rules also determine the entries to be made with respect to the share capital. In the case of a federally regulated corporation, the declared cash amount of the dividend paid in shares is recorded in the relevant declared capital account .
Therefore, in both Canada and Quebec, a stock dividend is paid in the form of new shares of the company , without any cash outflow corresponding to the payment of a cash dividend. However, this lack of cash outflow does not mean that the dividend is tax-exempt for the shareholder. For tax purposes, a stock dividend is generally considered a dividend, and its amount may be taxable for the shareholder in the year it is received. Therefore, one does not necessarily have to wait for the future sale of the shares for a tax consequence to arise.
The " amount " of a stock dividend generally corresponds to the increase in the company's paid-up capital resulting from the dividend payment, and not to the future market value of the shares. For an individual shareholder, this amount is also used to determine the tax cost of the shares received. When the stock dividend is a taxable dividend from a corporation resident in Canada, its tax treatment must be determined according to the rules applicable to dividends, including those relating to dividend gross-up and dividend tax credits, depending on the nature of the dividend.
Thus, for an individual shareholder, shares received following the payment of a stock dividend generally have a tax cost determined based on the amount of the stock dividend . This cost must be taken into account when determining the adjusted cost base (ACB) applicable to the shares and may affect the calculation of a capital gain or loss upon their subsequent disposition.
However, a dividend paid by a corporation in the form of shares of another corporation is generally considered a dividend in kind , not a dividend in shares, for income tax purposes. This is because, for tax purposes, a dividend in shares refers to a dividend paid through the issuance of shares of a class of the share capital of the corporation paying the dividend.
A stock dividend can be advantageous for a company wishing to pay a dividend without making a cash outflow equivalent to a cash dividend . However, it does not allow the shareholder to freely choose when they will be taxed, since receiving the stock dividend itself can trigger tax consequences.
Stock dividends can also be used in certain tax or corporate planning contexts, share capital reorganizations, or estate planning . However, their use must be analyzed in light of the share capital structure, the objectives pursued, and the applicable tax consequences for both the company and the shareholders.
It is always appropriate to consult a tax specialist or accountant regarding such a declaration of dividends, particularly to determine the tax consequences for the company and shareholders.