Today we'll focus on the use of dividends being paid to you through the ownership of shares in your incorporated business. As my husband said to me the other day "What is this dividend that you speak of, and how do I get me some?"
Definition of a Dividend
A dividend is defined as "a payment made by a corporation to its shareholders". You don't have to buy stock in a Fortune 500 company to get a dividend. If you have incorporated, you will hold shares in your Company, and are now a shareholder of your Company. Thereby, your Company can issue dividends to you.
Also, for the purposes of this blog post, I am talking about non-eligible dividends, as that is generally what you are going to see issued from your Company.
When Dividend Talk Comes Alive
Typically, dividends are issued because you owe the Company money. As well, you did not treat yourself as an employee with a wage and monthly source deductions being remitted, or accrued a bonus at year end, or you are doing a combination of wages and dividends [another discussion for another day]. How is this? Well, throughout the year, if your business has money coming in, you will pull money out of the business so you can pay your own personal bills. This creates what we Accountants term as a shareholder loan. This loan can go up and down. If you are pulling money OUT for personal use, shareholder loan from the business will go UP (e.g. you owe more to the Company). If you are putting your own money IN the business, shareholder loan will go DOWN (e.g. you owe less to the Company). Simple, right?
Why Can't I Owe Money to my Company?
In a word - Canada Revenue Agency (AKA CRA). If you owe money to the Company, CRA views this as a loan from the Company. With any loan, interest needs to be charged. If you are getting a loan from the Company, and no interest is being charged, it is deemed by CRA as a benefit to you in the form of an interest free loan. More importantly, you do not want your shareholder loan to become a significant receivable, or AKA asset on the balance sheet, where you no longer are a qualified small business corporation. Significant Shareholder Loan Asset = Significant Problems. Check out this discussion about Shareholder Loans by taxtips.ca. There are always other options, but again, let's keep this simple.
Ok, A Dividend has Been Decided, Now What?
You have worked with your Accountant, and a dividend will be issued. Your lawyer will provide a Dividend Resolution that you will sign, and retain in your Corporate Minute Book. Your Accountant will issue a T5 from the Company to you personally. T5's are due to be remitted by the Company to CRA by the end of February, following your year end. So for 2015, if your year end falls during 2015, your T5 needs to be filed by the Company by February 29, 2016. [AKA the most wonderful time of the year for Accountants, but I digress].
Effect on Corporate Tax Return
The dividend will be recorded on your T2 Corporate Tax Return. For accounting purposes, the actual dividend will not appear as an expense on your Income Statement, it will be a deduction on your Retained Earnings statement. For tax purposes, in 2015, the actual dividend (e.g. the accounting dividend amount your Company recorded) is grossed-up by 118% for tax purposes, and taxes payable are charged on this grossed-up amount. The benefit of issuing non-eligible dividends, is the dividend tax credit. This tax credit reduces the amount of corporate taxes payable by the Company. In BC, for 2015, the dividend tax credit is a combination of the Federal 11.017% and BC 2.59% on the grossed-up dividend amount.
Effect on Personal Tax Return
This T5 will be reported as income on your T1 Personal Income Tax Return. You will pay tax on the grossed-up amount (e.g. Box 11 for non-eligible dividends, at 118% gross-up for 2015). Depending on the amount of the grossed-up dividend, here is BC's marginal tax rates for non-eligible dividends [focus on the second table, last column for rates at different levels of grossed-up non-eligible dividend income].
I'm pretty sure if you have read to this point, I have reached official glaze-over-eyes status and that's ok, I get it. If you take away anything, the more knowledge you have, the more power you have to understand why decisions are made to issue a dividend. Have the discussion, and you will see the benefits.
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