Dividends are shares of a company’s profits that are allocated to each of the company’s shareholders. Dividends are often paid to shareholders in cash, but some companies choose to pay dividends in stock.
In this article, the tax specialists at T2inc explain how stock dividends are paid.
Stock dividends: not so different from regular dividends
Stock dividends are not so different from regular dividends. As their name indicates, stock dividends are paid out in company stock. The value received by the shareholders is based on the securities’ fair market value at the time they are issued.
If a company is inclined to hold onto its liquidity for whatever reason, it can decide to issue new shares and distribute them to shareholders. It’s important to note that the method of payment (cash or stock) the company chooses does not affect the value of the dividend.
Stock dividends and taxation
Generally, a stock dividend amount will be equivalent to the share’s paid-in capital. However, the share amount can sometimes differ from the amount of paid-in capital.
In any case, the paid-in capital will be the amount that appears on the shareholder’s income tax return, so that will be the amount added to the shareholder’s income.
Stock dividends issued by a taxable Canadian corporation are subject to the same gross-up provisions as cash dividends. They therefore benefit from a lower tax rate than other types of income.
It’s best to consult an experienced corporate tax professional for reliable tax advice and recommendations.
Why choose stock dividends?
Generally speaking, corporate stock dividends tend to be a safer investment than growth stock. They are less volatile and can help diversify shareholders’ portfolios while reducing risk. That’s one of the reasons why stock dividends are currently popular with investors who prefer to focus on the long term. Furthermore, stock dividends offer investors two ways to generate profit: dividend payments and the share price itself increasing.
When searching for solid stock dividends, investors should look at the dividend payment history of the companies they are interested in. It’s best to look back through at least 10 years of history, paying particular attention to the variation in dividend payments over the years (increases, decreases, stagnation, omission).
Unlike share prices, stock dividend payments remain reliable, apart from the risk of decreases in the payments. Furthermore, capital gains tend to be higher for stock dividends.
The advantages of regular dividends also apply to stock dividends:
- Ideal source of passive income for investors who are looking for long-term, income-oriented investments
- A company that pays dividends in any form is generally considered to be more stable
When are stock dividend payments made?
Paying dividends to shareholders is a matter that companies take very seriously. Emphasis is placed on transparency, financial responsibility and making sure that the value shareholders receive is as accurate as possible. Companies follow a dividend payment model that involves four key dates.
The declaration date
The declaration date is the day when the board of directors meets to decide whether or not to pay dividends to its shareholders. The meeting usually takes place weeks before the decision is announced to shareholders.
The record date
The record date is the day when the company lists all of the shareholders who are eligible to receive dividends.
The ex-date is the deadline by which a stock transaction must be completed. Otherwise, the seller of the shares will receive the dividends, not the buyer.
The payment date
The payment date is the day when the company distributes dividends to eligible shareholders.
Dividends are usually paid on a quarterly basis, i.e. four times a year. Fewer and fewer companies are opting for monthly, semi-annual or annual payments.
Contact T2inc for any questions about corporate taxation
Stock dividends are dividends issued by companies in the form of shares. The share amount will generally correspond to its paid-in capital.
Want to find out more about stock dividends and their impact on your company’s finances? The tax experts at T2inc help Quebec SMEs file their corporate tax returns and understand the processes involved.
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