Can a CCPC that has been open for 20 years and has retained earnings but has no income for the fiscal year or very little income pay out a dividend to 1 or 2 of the officers?
Retained earning = $100,000
Business income = $0 or $1000
Dividend paid = $5000 or more to each officer??
This is generally a legal question rather than a tax question, and may depend on the corporations act of the jurisdiction in question. But in principle, dividends are a distribution of past earnings.
As far as I am aware you can as long as the officers getting dividends have different classes of shares to get different amounts of dividends and that there are not any people not getting dividends that have the same classes of shares as the people getting dividends. Any given class of shares must pay out dividends of the same amount to all registered shareholders of that class. It is the reason why mom and pop operations typically have the pop with class A shares, mom with class B shares and kids with class C, D, E etc shares with 1 kid to a share class so that you can dividend sprinkle to only those that you want to pay dividends to
As @iain.fyffe stated, it is mostly a legal issue. Who is going to stop them? CRA? No. RCMP? No. CSIS? (haha). The only stakeholders that might complain are the corporation’s suppliers and debt-holders (lenders/lessors) if the company decides to pay dividends instead of paying their payables and debt obligations. Also, some shareholders might complain, if certain class-holders are issued dividends and not others, but that is an internal dispute between the shareholders and directors.
As @laurie alluded to, OFFICERS are not entitled to dividends. Officers are elected or appointed or HIRED by the shareholders, but are not necessarily shareholders themselves. Only actual SHAREHOLDERS are entitled to dividends.
I was once in a seminar, and someone discussed, when you are paying dividend in a loss year, that’s an indication that dividend is substitute of payroll, essentially, to avoid payroll source taxes, so CRA could potentially treat that as payroll requires source, because dividend is a distribution of earning, which you can not do with a loss
Sorry should have included more information.
@laurie Officers are the only shareholders and CCPC is Non-distributing corporation with 50 or fewer shareholders that owe preferred shares (I believe and not common)
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@Nezzer and @iain.fyffe More interested in if it raises a red flag with CRA not legal issues and there are no debt obligations
Sorry, but it will only let me tag 2 people per post because I am new here
@jeffliu that was my thinking but there is no answer one way or the other just opinions
I hate it when someone states ‘I do not see why not’ like it is some grey area.
No, it does not.
If, for some reason, CRA was auditing the client, and there was a dispute that eventually ended up in court, THEN it is possible that CRA may put forth the argument that the dividend payments should have been payroll (as suggested by @jeffliu ). This would have to be supported by the facts, such as a lack of remuneration to officers in light of evidence showing that the officers expended time and effort in exercising their duties as officers, rather than the simple expectation of a return on their investments as shareholders (i.e. dividends).
All of that goes back to it being a legal issue - what were the intentions of the shareholders/directors/officers, what were the legal obligations of the corporation, etc.
Bottom line: if the corporation is basically inactive, there is no tax revenue that CRA expects to collect, so CRA does not care what the owners do with the residual cash. Dividends mean that the shareholders will pay personal tax on that income, so CRA will be happy about that.
The answer should be in the articles where those preferred shares were created. It should describe the rights of the preferred share holders to dividends (unless the attributes of those shares have been amended after originally being created). If you’re still unsure, have someone check with the company’s lawyer. You won’t get a definite, reliable answer here. No one has enough information.
I don’t know the province of incorporation but most corporate legislation allows you to pay dividends as long as the net value of the assets in the company will be still positive after paying the dividends. I’d still have your clients check with the company’s lawyer if you’re still unsure.