Cases
Delage v. Canada, 2002 DTC 7061, 2002 FCA 212
The taxpayers were unable to establish that an amount paid to them as a dividend was, in fact, salary for services.
Dale v. R., 97 DTC 5252, [1997] 2 CTC 286 (FCA)
At the time of a purported capital dividend on preference shares, the authorized capital of the corporation had not yet been amended to include preference shares. However, in a subsequent taxation year, an order of the Nova Scotia Supreme Court was obtained that the authorized share capital and issued share capital of the corporation should be retroactively amended to reflect the issuance of the preference shares prior to the dividend. Accordingly, the capital dividend was valid.
M.S.S. Inc. v. The Queen, 87 DTC 5088, [1987] 1 CTC 130, [1986] 2 CTC 99 (FCTD), aff'd 89 DTC 5502 (FCA)
Alleged management fees paid by the taxpayer to its parent corporation were found in reality to be dividends, as no management services had been provided by the parent corporation.
The Queen v. Cranswick, 82 DTC 6073, [1982] CTC 69 (FCA)
The income which is typically earned by shares is dividends. A payment on shares that was of an unusual and unexpected kind, i.e., a voluntary payment by the company to avoid a possible complaint by the shareholders about the sale of part of the company's assets, was not income from those shares to the shareholders.
Bernstein v. MNR, 74 DTC 6041, [1974] CTC 4 (FCTD), aff'd 77 DTC 5187, [1977] CTC 328 (FCA)
The sale by a corporation to its shareholders (Bernstein and Kamichik) of shares of a subsidiary worth $100,000 for a sale price of $200, was not a dividend. "There was no meeting of directors at which any dividend was declared and the elaborate scheme which was adopted to eventually get cash from the company's surplus into the hands of Messrs. Bernstein and Kamichik could hardly be considered as the payment of a dividend."
Guilder News Co. (1963) Ltd. v. MNR, 73 DTC 5048, [1973] CTC 1 (FCA)
At 5053:
"[M]any of the amounts that would fall under section [15(1)] would not fall within the concept of 'dividend' in its ordinary sense in this context, which, as I conceive it, is 'sum payable ... as profit of joint-stock company' even though it were accepted that the term applies to a division of profits otherwise than in the manner required by the governing company law."
Gabco Ltd. v. MNR, 68 DTC 5210, [1968] CTC 313 (Ex Ct)
In finding remuneration paid to the younger brother of the principal of a corporation in proportion to a shareholding to be deductible, Cattanach J. stated (p. 5214):
"I can see no legal impediment to the appellant basing the greater bulk of the remuneration paid to its employees who were shareholders upon a declared bonus in successful years divided among them pro rata according to their shareholdings ... Under ordinary corporate principles I should have thought the same result could have been accomplished by the declaration and payment of dividends on the common shares except that the amount of the dividends declared and paid would be income in the hands of the appellant and taxable accordingly rather than deductible as an expense laid out to earn income. However it was not raised in argument nor in the pleadings that the appellant was precluded from making the arrangement that it did with its employees."
See Also
Ahmad v. The Queen, 2013 DTC 1112 [at at 601], 2013 TCC 127 (Informal Procedure)
Before finding that a distribution in kind by a Bermudan corporation ("Tyco") was a taxable dividend to the taxpayer under s. 90, Rip CJ quoted with approval (at para. 13) the statement in Special Risks that a dividend is:
any distribution by a corporation of its income or capital gains made pro rata among its shareholders.
Marshall v. The Queen, 2011 DTC 1353 [at at 1976], 2011 TCC 497
The taxpayer was a shareholder of a Bermudian corporation ("Tyco"), and received shares as part of the same spin-off described in Capancini, where it was concluded Tyco had never owned the shares received by the taxpayer and therefore that they were not dividends in the hands of the taxpayer under s. 12(1)(k) and s. 90(1). However, Capancini had been heard under informal procedure. In the present case the Minister introduced evidence establishing that the two spin-off corporations were incorporated in Bermuda in 2000 as wholly-owned subsidiaries of Tyco. Therefore, the conclusions in Capancini could not be relied on and V.A. Miller found that the shares of the two spin-off corporations were dividends in kind.
Capancini v. The Queen, 2010 DTC 1394 [at at 4569], 2010 TCC 581 (Informal Procedure)
Under a reorganization, the Canadian-resident taxpayer received, in exchange for shares he previously held of Tyco International Ltd. (a non-resident corporation), one share of each of two new corporations and one new share of Tyco International Ltd. The Minister assessed on the basis that the receipt of the shares of the two new corporations represented a dividend to the taxpayer. In finding that the taxpayer had not received a dividend, Bowie, J. noted that the shares of the two new corporations were never owned by Tyco International Ltd. and, instead, were created in the course of a reorganization, and that the distribution of the new shares did not represent a "dividend" in the ordinary meaning of the word, namely, a distribution of a pro rata portion of a company's earnings or profits.
Mulligan v. R., 99 DTC 951, [1999] 3 CTC 2092 (TCC) (Informal Procedure)
Before going on to find that the taxpayer had received a dividend notwithstanding the absence of formal corporate action by the directors (i.e., she and her husband), Rip TCJ. stated (at p. 957) that "the state of corporate law today is that the formalities required by statute or the articles of the corporation may be bypassed if the shareholders or directors who have the power to authorize the action unanimously approve of the action".
Memec plc v. IRC, [1998] BTC 251, [1998] EWCA Civ 941 (CA)
In order to minimize German corporate tax payable by its German subsidiary ("GmbH"), the taxpayer "Plc"), which was a UK company, formed a silent partnership (stille gesellschaft) with GmbH, which entitled it to annually receive most of the profits of Gmbh. In order for Plc to receive a UK foreign tax credit for local trade tax payable by subsidiaries of GmbH, it was necessary to conclude either that (1) the silent partnership was fiscally transparent, so that GmbH as the silent partner was to be treated for UK corporation tax purposes as entitled to a share of the dividends paid by the GmbH subsidiaries to GmbH (all of which, in turn, were paid to Plc), or (2) that the share of the profits of the silent partnership paid to Plc could be treated as dividends paid by GmbH to Plc.
After finding against Plc on the first issue, Peter Gibson LJ found that an extended definition of "dividend" in the Article of the UK-German Treaty respecting withholding tax (which included a participation in a silent partnership) did not extend to the relevant Article of that Treaty according the UK foreign tax credit. In the absence of the extended definition applying, Plc's share of GmbH's profits under the silent partnership did not qualify as a dividend under the ordinary meaning of that term (p. 262):
The ordinary meaning of 'dividend' is that it is a payment of a part of the profits for a period in respect of a share in a company (Esso Petroleum Co Ltd v Ministry of Defence [1989] BTC 500 at p. 502; [1990] Ch 163 at p.165)....To treat Plc's entitlement to a share of the profits of GmbH under the silent partnership as a dividend, when that payment was unrelated to shares in GmbH and the partnership is not a company, would be inconsistent with the ordinary meaning of 'dividend'.
Canadian Pacific Ltd. (1990), 72 OR (2d) 545 (Ont HCJ.)
A proposed distribution by a public company to its common shareholders of a subsidiary pursuant to a butterfly reorganization was found to represent a proposed dividend for corporate law purposes. Austin J. stated (at p. 567):
"There is a good deal of authority for the proposition that, as a matter of law, an operating company can only make two kinds of distribution to its shareholders - retained income and capital. The former is frequently called a dividend."
Anderson v. The Queen, 98 DTC 1027 (TCC)
Amounts paid to the taxpayer one day prior to the sale of their shares to the purchaser were found to be dividends rather than remuneration or management fees given that the only evidence favouring the latter interpretation was the deduction of the amount so paid in the paying corporation's financial statement following the appointment of new accountants by the purchaser.
Daggett v. MNR, 93 DTC 14, [1992] 2 CTC 2764 (TCC)
The purported payment of a dividend was ineffective because payment of a dividend would have impaired the capital of the corporation contrary to the provisions of the Alberta Companies Act.
Re Telsten Services Ltd. (1981), 39 C.B.R. (N.S.) 68 (S.C.O.)
Payments made to a company's shareholder that were treated in the company's books as dividends, were not dividends for purposes of the Bankruptcy Act because they were intended to compensate the shareholder for his activities on behalf of the company, rather than being related to his capital interest in the company. The payments were designated in the books as dividends only for tax-planning reasons.
Canadian Pacific Ltd. (1990), 72 OR (2d) 545 (Ont HCJ.)
A proposed distribution by a public company to its common shareholders of a subsidiary pursuant to a butterfly reorganization was found to represent a proposed dividend for corporate law purposes. Austin J. stated (at p. 567):
"There is a good deal of authority for the proposition that, as a matter of law, an operating company can only make two kinds of distribution to its shareholders - retained income and capital. The former is frequently called a dividend."
Cangro Resources Ltd. v. MNR, 67 DTC 582 (TAB)
A payment received by the taxpayer that was stated to be made out of "paid-in capital and paid-in surplus" pursuant to the provisions of the Wisconsin Business Corporations Act was found to be a dividend for purposes of the Act. Mr. Davis stated (at p. 585) that:
As the funds distributed by Marine Capital Corporation admittedly represented nothing more than premiums paid into the treasury on the purchase of shares at prices in excess of their par value of $1 per share, the share capital was neither disturbed nor impaired by the distribution of these funds.
And (at p. 586) that:
There is no question but that the appellant received its proportionate share of the fund, it having been distributed on the basis of the number of shares of Marine Capital Corporation held by each shareholder. ...[T]herefore...the payment...was a dividend received by the appellant... . The accepted ordinary meaning is to be given to the word as it is used in the Income Tax Act. The Shorter Oxford Dictionary states that the word 'dividend' is derived from the Latin word dividendum and defines it as 'a sum of money to be divided among a number of persons; a portion or share of anything divided, especially the share that falls to each distributee'."
Administrative Policy
11 April 2017 Internal T.I. 2016-0670541I7 - Foreign affiliate share redemption
Canco held the preferred, but not the common, shares of a Barbados International Business Company (“FA”), and its preferred shares were redeemed. Although the facts are mostly redacted, it would appear that the resolution pursuant to which FA redeemed the shares provided that a portion of the proceeds paid on the redemption was a dividend, and Canco apparently relied on this wording rather than making a s. 93(1) election. The Directorate stated:
If there is only, as a matter of law, a redemption and cancellation of shares, or if there is no conclusive evidence as to whether there is, in part, a dividend, we would generally view all such amounts as having been received as proceeds from the disposition of the… Shares, and no amount as having been received as a dividend.
25 August 2014 External T.I. 2014-0528361E5 - premium on redemption of foreign affiliate shares
After noting that in 2012-0439741I7 [immediately below] "we indicate that upon redemption of MRPS [mandatory redeemable preference shares], the redemption premium would be characterized as a dividend," CRA stated:
This statement does not reflect the views of the CRA. In the absence of an election under subsection 93(1) of the Act, redemption proceeds are treated as proceeds of disposition. Accordingly, Rulings document 2012-0439741I7 will be removed from our database.
30 April 2013 Internal T.I. 2012-0439741I7
Mandatory Redeemable Preferred Shares ("MRPS"): are voting; have a mandatory redemption date approximately 10 years from the allotment date, with the redemption proceeds (equal to the issue price, plus the Premium accrued to the redemption payment date) to be paid in cash on the mandatory redemption date; and have a Premium equal to the per share equivalent of (a) a fixed premium of 7.1% per annum of the issue price, compounded quarterly, plus (b) a variable premium of 5.5% of the aggregate net profit after tax less, minus any amount paid by way of dividend. The TSO position was that the MRPS were debt, consistent with their accounting treatment and their treatment for tax purposes "in other jurisdictions."
In indicating that the MRPS would be considered equity, CRA stated that "generally speaking, we will respect the form of the investment regardless of how it is accounted for or how it is treated for tax purposes in other jurisdictions," and that "payments of interest or dividends will derive their income tax consequences from the legal nature of the payment." Respecting the redemption Premium, "as it is paid on a share investment, we consider it to be a dividend."
16 April 2012 External T.I. 2011-041149
A Canadian-resident individual owns all the shares of an Alberta unlimited liability company which, in turn, owns a majority of the membership units of a US LLC. As a result of both corporations being fiscally transparent entities under US tax law, the individual is required under US tax law to pay tax on his proportionate share of the income of the LLC. The management of the LLC pays the US tax liability of the individual.
After noting that:
any distribution by a corporation of its income or capital gains made pro rata among its shareholders may properly be described as a dividend, unless the corporation can show that it is another type of payment;
CRA indicated that the payment of the taxes by the LLC would not be considered a dividend "as the payment would not constitute a pro rata distribution by a corporation among its shareholders."
22 January 1997 External T.I. 9701295 - Dividend in kind - U.S. divestiture
In indicating that a dividend in kind received by a Canadian shareholder from a U.S. corporation would be taxable, RC stated:
"It is our view that a dividend can include any pro rata distribution of property by a corporation to its shareholders that is not a return of the paid-up capital of a corporation. For this purpose, it does not matter whether the corporation making the distribution is a Canadian resident or not. We find support for this position in Cangro Resources Limited(in liquidation) v. Minister of National Revenue, 67 DTC 582."
8 April 2004 Internal T.I. 2003-0037291I7 - US LLC and Regulation 5907(1.3)
A wholly-owned US C-corp subsidiary (US Holdco) of a taxable Canadian corporation wholly-owned two LLCs, which earned only foreign accrual property income, with their income being included in that of US Holdco for Code purposes. In the course of considering whether any of the US taxes paid by US Holdco on such income qualified as foreign accrual tax, CRA stated:
when the LLCs distribute income to US Holdco such distribution would be characterized as a dividend.
10 March 2003 Internal T.I. 2002-0172187 F - DEDUCTIBILITE DES INTERET
A debenture issued by a corporation provided for the payment of base interest plus the payment of an “additional interest” on maturity that was the greater of a fixed amount and a formula amount based inter alia on the imputed value of the corporation’s equity. Before going on to find that there would be a s. 20(1)(f) deduction for the additional interest if it did not satisfy the requirements for deduction of participating interest under s. 20(1)(c), the Directorate indicated that it could not be treated as a dividend, stating:
The Act contains no specific definition of the word "dividend", but subsection 248(1) stipulates that a dividend includes a stock dividend. Since the Act does not give any specific meaning to the word "dividend", it must be given its ordinary meaning. Consequently, any proportional distribution of income or capital gains by a corporation to its shareholders may be considered a dividend payment, unless the corporation can demonstrate that it is some other type of payment. The fact that such a distribution is not to be called a dividend payment does not change its nature. In light of this proposition, in order for an amount to be considered a dividend, it must be distributed to a person who qualifies as a shareholder of the Corporation, which does not appear to be the case here. … Consequently, you cannot characterize this amount as a non-deductible dividend to the corporation.
9 May 2002 Internal T.I. 2002-0135307 F - Application du paragraphe 39(2)
Before going on to find that if a distribution made from a Delaware subsidiary’s surplus would be a dividend for ITA purposes if it was a dividend under the Delaware corporate law, the Directorate stated:
Generally … a dividend includes any distribution of property by a corporation to its shareholders, with the exception of a distribution that constitutes a return of paid-up capital in respect of a class of shares of the corporation (see documents # E 9415515, E 9428025 and E 9515666). In this regard, whether or not the corporation is resident in Canada is irrelevant … .
8 January 1996 External T.I. 9428025 - RETURN OF CAPITAL FROM A DELAWARE CORPORATION
It is the Department's view that a dividend can include any distribution of property by a corporation to its shareholders that is not a return of the paid-up capital of a corporation." Because under the Delaware corporate law, "it is not possible for a corporation to make any asset distribution by reducing its capital" and "cash distributions must be made from the surplus account and constitute dividends" under such law, such a distribution from a Delaware corporation's surplus account will be a dividend for purposes of s. 90(1) of the Act.
16 May 1994 External T.I. 9404565 - COURT ORDERED CORPORATE DISTRIBUTION
A court order directing a corporation to pay a "dividend" to an inactive shareholder in order to compensate him for the undue depletion of the corporation's equity caused by excessive management fees paid to the other shareholders in previous years would not give rise to a dividend unless the payment "represented a dividend duly declared by the Board of Directors to be payable on a pro rata basis to the owners of the shares of a particular class of stock".
5 September 89 T.I. (February 1990 Access Letter, ¶1101)
Interest on the preferred share of a Quebec cooperative falls within the definition of a "dividend" as a sum to be divided among a group of persons, or the allotment payable to each person.
IT-67R3 "Taxable Dividends from Corporations Resident in Canada"
"Any distribution by a corporation of its income or capital gains made pro rata among its shareholders may properly be described as a dividend unless the corporation can show that it is another type of payment."
Articles
John R. Owen, "Foreign Entity Classification and the Character of Foreign Distributions", 2005 Conference Report, c. 20
Discussion of the nature of a dividend.
Wertschek, "The Tax Advisor and Commercial Law: Some Issues", 1993 Conference Report, C. 24
Discussion (at pp. 9-12) of whether amounts paid as dividends in contravention of the governing corporate law will retain their character as dividends.