Hi!
I have a question in regards to issuing a T5 from a corporation. Say a corp declares a dividend to a shareholder (say in 2020), but doesn’t actually pay it until the next year (2021). In which year should the T5 slip be issued? (from my understanding, it should be issued when paid hence in 2021). For tax planning, I would like to issue it in 2020 as that year my client had less revenues but am not sure if it is allowed… Thank you for your help!
Just a word of caution here: a dividend is - even for a sole shareholder corporation, which tend to take…let’s call it “liberties” with certain formalties - nonetheless, a formal Resolution of the Board of Directors of the Corporation. In theory a dividend is decided upon, evidenced by a Resolution of the Board and states: the date the dividend is payable (or the period during which it is payable), the amount of the dividend (typically per share, but can also be in aggregate for the class of shareholders), the class of shares to which the dividend applies, and any special elections which may need to be addressed (eg a Capital Dividend). Indeed, for a Capital Dividend, CRA requires the documents evidencing same in advance of payment.
CRA, during certain types of audits will almost always request a copy of the Minute Book, in which Dividend Resolutions - among other things - should be found, signed and memorialized.
In general, one doesn’t just “give” a shareholder a dividend. On the other hand…I’ve seen (when I was in Audit long ago) Minuted Dividends that I was pretty sure were drawn up long after they were declared, and possibly only hours before the Minute Book was supplied to me …but absent any proof to that effect there wasn’t much to be done. I’m SURE it happens all the time…not exactly as it should.
Does CRA always care? No…not always…but they can. And that it what matters. Otherwise that “dividend” may get taxed much more unpleasantly.
Typically, the recipient of a dividend isn’t the one deciding whether the corporation will issue dividends. The board of directors decides whether dividends will be declared, and when they will be paid, and that decision is recorded in the minutes of a meeting. However, in small private corporations, all those roles may be held by the same person. You have to separate the roles to determine legally what should be done.
So, if the “owner” of the corporation, in his/her capacity as director, decides that the corporation will declare dividends in 2020, that should have been recorded in the minute book already, and recorded in the accounting records as “dividends PAYABLE”. That payable would be cleared when the dividends were actually PAID (at some point in the future).
Usually there is not that much time between the date “payable” and the date “paid”, so it’s not difficult to determine in which year you must file the T5. But, I think you are correct in that the T5 is based on the date when the dividends are paid. See:
You’re right in that, for a private corporation, the recipient of the dividend is also the corp’s owner. I can’t see any situation where you’d have a dividend declared in one year, paid in the next, and set it up as a dividend payable. It’s not a payable until the payment date has come and gone. Setting up a dividend declared but not paid makes for some additional work on the T2. Sch.3 refers to both dividends received and dividends paid, not dividends receivable and dividends payable. Were it not for this wording, you could have the corp receive a tax benefit, in the form of a refund of RDTOH, a year before the individual is taxed on the dividend.
However, for a corp or an individual with an investment portfolio through a broker, investment income is routinely included on a T5 when the actual credit to the investment margin account is in early January of the following year. So, a dividend declared Dec.20 but not credited to the recipient’s account until Jan.7 of the following year is taxed in the year declared. But, this practice is not done consistently, 100% of the time. I’ve seen other dividends received in January, declared the prior December, and they were not included on the prior year T-slip.
It has always been my practice to report a dividend both for the corp and the shareholder in the year paid. I realize this is not in agreement with the treatment of employment income in the form of a bonus. A corp will claim the additional expense in the year accrued, while the shareholder/employee is taxed in the year paid. Presumably, one or more politicians benefited from this arrangement way back when the arrangement was passed.
In my experience, using ‘dividends payable’ can be a valuable tax planning tool in small business corporations.
They can be set to be paid one year later, and so, in the case of a shareholder loan overdraw, which has to be repaid within the next year, can be used to ‘cover’ the overdraw.
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@marina
Great question.
@SmallBizGuy
@Nezzer
Great reminder of the critical importance of following the required legal procedures, issuing the documents, and maintaining a compliant and complete Corporate Record Book. The is especially true for Director and Shareholder minutes, shares register, and shareholder loan documentation and shareholder interest paid on loan amounts received.
@BertMulderCGA
For the teeny corporation the “dividends payable” and “shareholder loan” accounts and the CRA acceptable procedures and documentation are two very important and often much discussed areas in tax planning and tax preparation for micro and small corporations. Thanks for your comments.
In my experience, depending upon the nature of the tax preparer and/or their firm, this is often missed and/or not properly documented or reported.
In most cases when I am scoping the work of taking on a new to me client, when I asked for the corporate record book and financial documents, clients looked at me confused.
Often they reply with:
What is a Corporate Record Book?
Why do you need the prior year(s) tax returns?
I don’t have a GL.
My prior accountant didn’t prepare a GL. The compilation is part of their working papers which they won’t share. There are no continuities or reconciliations. etc.
Hmmm.
QUESTION
What does CPA Canada require be produced and remitted to the business under the updated compilation for tax preparation purposes only engagements?
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Or they just stare at you like a deer in the headlights… 
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This! For sure…this!
… and off topic, but the bigger question this year might be:
What does CPA Canada require to be produced and implemented regarding a Quality Management System for practitioners performing compilation engagements? My understanding the deadline for implementation of the new Canadian Standard on Quality Management (CSQM) for related services (including compilations) is December 15th, 2023.
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While there can be a delay between the declaration and the payment of the dividend be careful!
I had reason to inquire with a lawyer about the timing of a very important dividend (we wanted it to appear on a Rights and Things return after my client’s death, so the dividend had to be declared while he was alive and paid after his date of death - which because of MAID was a known date).
There are rules in the Business Corporations Act about how long of a period of time can elapse between the declaration and the payment. In Alberta it is 50 days.
If a CRA agent would know that or not is up to each individual agent, but that is a different matter!
Re: Alberta
For Reference from Business Corporation Act
Its Section its Section 133(2)
… but that record date shall not precede by more than 50 days or …
Also, watch for Section 43 trap where if the Corporation does not have enough liquidity or its liabilities are much higher than Assets, its against the Act to issue Dividends.
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I’d suggest care in the general interpretation of Sec 43, though, in context with the initial consideration:
A corporation shall not declare or pay a dividend if there are
reasonable grounds for believing that
(a) the corporation is, or would after the payment be, unable to
pay its liabilities as they become due, or
(b) the realizable value of the corporation’s assets would
thereby be less than the aggregate of its liabilities and stated
capital of all classes.
What might constitute “reasonable grounds”?
- an ongoing contracting business with a history of successful income generation over a number of fiscal years (service businesses are a good example, as are consulting ones)
- a business where the principal shareholder has a history of supporting the business by either share purchase or shareholder loans over time
This comes up rather often with ongoing businesses…and those that have continued to flourish despite large dividend distributions, I’d argue any day do NOT have reasonable grounds for challenge.
All Business Corp Acts seem to include similar language. I’ve not researched it recently, but I can’t recall a case where CRA successfully challenged an “improper” dividend on the above basis. It would also be interesting to know if CRA actually has “standing” in such a circumstance as they are not a shareholder, and I’d suspect that only a shareholder could challenge same.
(This does NOT apply in the case of improperly paid or unpapered dividends, of course.)
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Thank you for the valuable feedback! @jglass
I agree with you @Nezzer that I read the rules as 'issue the T5 in the year actually paid" and not when declared.
My client’s corp is a tiny company whereby the owner is the shareholder/Director/BoD 
If the corp declared the dividend in 2020, but actually paid in Jan 2021, does the T5 to the owner gets issued in 2021 (the year paid) or can we do 2020 (as date declared).
From my understanding, the T5 should be issued for 2021. For tax planning, it would be preferrable for the client to have the T5 in 2020 (as no other personal sources of income) so I am just trying to find if there is a ‘fine-print’ rule somewhere that would allow that…
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