What is the dividend paid by issuing fully paid shares?

Both in Quebec and Canada, a business corporation can declare and pay a dividend by issuing fully paid shares to its shareholders and that, without having the legal capacity to do so under applicable corporate laws because it involves no cash outflow for the business corporation.

The dividend paid by issuing fully paid shares is a dividend that is paid by the issue of new fully paid shares of the share capital of the business corporation paying this dividend; these are treasury shares issued by the business corporation. Shares received by a shareholder as a dividend paid by issuing fully paid shares can belong to the same class of shares that this shareholder already owns and on which a dividend on shares is declared or still, to any other class of shares of the share capital of the business corporation as it will be determined by its board of directors.

In the Quebec jurisdiction, the dividend paid by issuing shares consists of fully paid shares that the business corporation issues or still, of options or rights to acquire these shares.

Upon payment by a Quebec business corporation of a dividend paid by issuing fully paid shares, the latter shall add all or part of the monetary value of those shares to the issued and paid-up share capital account of the appropriate class; in the case of a federal business corporation, the amount declared in money for dividends paid by issuing fully paid shares is added to the appropriate stated capital account.

The "amount" of a dividend paid by issuing fully paid shares is usually an amount equal to the increase in the paid-up capital of the business corporation resulting from the payment of the dividend. This "amount" is added to the income of a shareholder as a taxable ordinary dividend and is subject to the same provisions of gross-up and tax credit for dividends. Shares received as a result of the payment of a dividend by issuing fully paid shares are deemed to have been acquired at a cost equal to the "amount" of the dividend paid by issuing fully paid shares.

A dividend paid by a business corporation in shares of another legal person constitutes a dividend in kind and not a dividend paid by issuing fully paid shares for the purposes of income tax.

It is always appropriate to consult a taxation expert or accountant concerning such declaration of dividends.