An undistributed dividend or “ordinary dividend” is a dividend that is taxable to the shareholder who receives it, and it is paid by the corporation out of income taxed at a lower rate for small businesses, with a reduced gross-up and dividend credit. In fact, undetermined dividends must be grossed up; however, their gross-up rate is considered low because it takes into account the lower taxes the corporation has paid. Also, the tax credit for these dividends is lower to account for the reduced corporate tax already paid.
Thus, the “ordinary dividend” is in fact a dividend paid in cash that is taxable to the shareholder receiving it, but at a rate different from that of income that would be received by that shareholder, such as a salary.
Once declared by the board of directors of the company, subject to any unanimous agreement of the shareholders, the “ ordinary dividend ” may be paid by the corporation to the relevant shareholders in various ways: 1) in a single lump sum, at the time the dividend is declared; 2) in consecutive, equal monthly installments; 3) on fixed dates established in advance by the board of directors; or 4) on any subsequent date to be determined by the board of directors, at its sole discretion.
In fact, the board of directors, subject to any unanimous agreement among the shareholders, has full discretion to determine the payment terms applicable to the declared dividend. In most cases, the board will determine these terms based on the company’s financial capacity at the time the dividend is declared, in particular by taking into account its accumulated retained earnings and its operating budget for the fiscal year to which the dividend declaration relates.