1/14/2010
Tax Tip -- Eligible Dividend Designations - Update!
Eligible Dividend Designations (Revised)
If your corporation would like to designate a dividend as an eligible dividend, the corporation is required to notify each shareholder that the dividend is eligible, in writing, at the time the dividend is paid. The Canada Revenue Agency has set out the following guidelines for designating dividends as eligible:
For public corporations
• Before or at the time the dividend is paid, a designation is made stating that all dividends are eligible unless indicated otherwise. This type of designation can be made through the following channels:
- Posting a notice on the corporation’s website – the designation will remain valid until the notice is removed.
- A notice in an annual or quarterly report – the designation will remain valid for that year or quarter depending on the type of report.
- Press release announcement declaring an eligible dividend – the designation will only apply to that specific dividend.
For all other corporations
Each time a dividend is paid, the dividend should be identified as an eligible dividend through:
1. Letters sent to all shareholders;
2. Dividend cheque stubs; or
3. Notation in the Minutes where all shareholders are Directors of a corporation.
A few tips from Soberman for making eligible dividend designations
- All shareholders of a particular class of shares must be included.
- You may not designate a fraction of a dividend as eligible – two separate dividends should be declared if there will be an eligible and non-eligible portion.
- Separate bookkeeping entries should be recorded for eligible and non-eligible dividends.
- Separate dividend resolutions should be prepared for eligible and non-eligible dividends.
Some planning ideas from Soberman
- If you have both Canadian-resident and non-resident shareholders holding the same class of shares, your “general rate income pool” (GRIP) balance will only be reduced by the portion of eligible dividends paid to the Canadian-resident shareholders, even though the full amount of the dividend must be designated as “eligible”.
- Consider separate share classes for individual family members if dividends will be paid to family members, including adult children (over 18 years of age), who are in lower tax brackets.
- If you would like to pay out a large dividend and know the entire amount will not be eligible, pay two separate dividends. One should be designated as eligible, and the other would be an ordinary dividend.
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