I recall reading somewhere (maybe the Business Corporation Act), that dividends should not be paid if the corporation owes taxes.
Here’s the scenario, shareholder use corporation bank account for personal expenses. The shareholder account is $180K debit balance (accumulated over 3 years). Previous accountant did not advise the shareholder on S.15 rules. Corporation owes payroll taxes of $41K for 2023. The company has no cash. The shareholder wants the corporation to pay dividends of $40 to bring down the balance. The shareholder was advised of S.15 rule of repaying the company. Shareholder has no money to repay the corporation.
I think the rule with most provinces is that the company can only pay dividends if, after liquidating their assets and paying liabilities, the company had retained earnings sufficient to cover the dividend. It is not related to whether the company is paying current year taxes.
Dividends give an opportunity to defer taxes at a personal level by using the timing of issuance of dividends as a tool. The timing of dividend withdrawals directly impacts the personal marginal tax rates.
Process of Dividend Issuance
Payment of dividends is largely governed by the business acts (or laws) of the jurisdiction in which the corporation is incorporated. Generally, directors of the corporation pass a resolution to issue a dividend to shareholders. Corporations must ensure compliance with relevant corporate laws to ensure that they meet the solvency tests and other corporate procedural requirements.
Can a Corporation Issue Dividends if there are losses?
Generally, No! If the corporation has negative retained earnings (losses), it cannot issue dividends. A corporation with negative earnings fails to meet the solvency test.
Technically, dividends are distributions of after-tax profits of a corporation. So, if there are no earnings in the first place, how can they be distributed?
Doing so might be a violation of the Canada Business Corporations Act, the Ontario Business Corporations Act, or other business corporation acts under which the corporation is incorporated.
Section 42 of the Canada Business Corporations Act clearly prohibits issuance/declaration of any dividend if the corporation will not be able to meet its liabilities afterwards or the net realizable value of total assets is less than liabilities plus stated capital of all classes.
What if the corporation has issued dividends or filed T5 from a loss-making business? If you have filed a T5 information return in rush just to meet the deadline, it can be amended or cancelled subsequently.
This is always best to consult your corporate tax accountant in Canada or a professional corporation tax service before issuing dividends.
There are already a few threads on here already about this subject and the difference between provincial corporate law and tax law (which says nothing about any of this for the most part). Look back in history.