Before being able to declare and pay a dividend in money to its shareholders, still the business corporation has to have the financial capacity to pay such dividend according to the criteria established by corporate laws.
Indeed, the Business Corporations Act of Quebec specifies that a business corporation cannot declare, nor pay a dividend if there are reasonable grounds for believing that it cannot or could not therefore be able to pay its liabilities as they become due. However, such criterion established by this law does not apply in the case of a dividend declared and paid by issuing fully paid shares or rights to acquire (being options) shares of its share capital.
For its part, the Canada Business Corporations Act establishes that a business corporation cannot declare, nor pay a dividend if there are reasonable grounds to believe that : (a) it cannot, or could not therefore pay its liabilities when due; or (b) the realizable value of its assets would therefore be less than the aggregate of its liabilities and its stated capital.
In practice, if the business corporation pays a dividend in property belonging to it, the criteria related to its financial capacity to do so will not have the same importance, nor the same impact on the latter insofar as it does not depart from substantially all of its assets.
In the case of a dividend paid by issuing fully paid shares of the business corporation, these criteria related to its financial capacity to do so as established by these corporate laws will not apply.
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