A dividend in kind is a dividend paid to shareholders through the transfer of one or more assets belonging to the company. It is therefore a dividend paid in a manner other than cash or shares of the company. The value of the transferred asset must be determined, taking into account, among other things, its fair market value , and its transfer may have tax implications for both the company and the shareholders receiving it.
These dividends may take the form of a distribution of tangible assets owned by the company, such as real estate, equipment, or other assets. The company may also, depending on the circumstances, distribute shares it holds in another company, particularly a subsidiary. After the dividend payment in kind, shareholders may retain or dispose of the assets received, subject to applicable legal and tax consequences.
When a dividend is declared in respect of a class of shares, its distribution must comply with the rights attached to the shares concerned , the company's articles of incorporation, and the dividend declaration procedures. In the case of an in-kind dividend, this distribution can lead to certain practical difficulties, particularly when several shareholders are entitled to the dividend and the assets to be distributed cannot be easily divided among them.
For example, if there are several shareholders in the class covered by the declaration of an in-kind dividend and the corporation owns several similar distributable assets, the allocation can be relatively simple. Thus, in the case of a manufacturing company, each of these shareholders could, depending on the circumstances and the terms of the declared dividend, receive an asset of the same nature and comparable value.
However, if there are multiple shareholders in the class covered by the declaration of a dividend in kind, and the declared dividend relates to a single asset belonging to the corporation, its distribution can become much more complex. Depending on how the transfer is carried out, the shareholders could, in particular, become co-owners of this asset. Such a situation can lead to difficulties regarding the use, administration, sale, or eventual distribution of the asset. Furthermore, when a shareholder becomes the owner or co-owner of an asset received as a dividend, their rights in that asset are separate from their status as a shareholder of the corporation. The subsequent sale of their shares therefore does not automatically result in the transfer or redemption of their share in the asset received.
In fact, this form of dividend declaration generally addresses specific needs , both for the shareholders receiving the dividend and for the company declaring it. Before proceeding, it is important to assess the nature and value of the assets involved, their potential for distribution among shareholders, and the legal, tax, and accounting consequences of their transfer.
The practical difficulties and tax consequences that may be associated with this form of dividend mean that the dividend in kind is less frequently used , even though Quebec and federal corporate laws allow a company, subject to the applicable conditions, to pay a dividend by means of goods.