Richard Weber at Taylor Leibow was kind enough to forward to me a CRA technical interpretation (2007-0229311I7) dated June 14, 2007, concerning the payment of dividends. A corporation purported to pay a capital dividend. The necessary election was filed, but the corporation forgot to reflect the dividend in its financial statements, and apparently the dividend was not otherwise paid. The CRA discovered these facts when conducting an audit.The corporation wanted to correct the problem by making journal entries to reflect the payment of the dividend and by correcting its financial statements in light of the entries. The CRA, however, took the position that journal entries by themselves could not effect the payment of a dividend. The CRA quoted from Hickman Motors Ltd. v. The Queen (1997), [1997] 2 S.C.R. 336, [1998] 1 C.T.C. 213, [1997] D.T.C. 5363, where the Court (at ΒΆ87) wrote “The law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions”.
According to the CRA, it is not necessary to use cash to pay the dividend. A corporation can pay a dividend using a note, but the payee must accept the note as absolute payment of the dividend.
2023 04 18 postscript – This technical interpretation is discussed in detail in Stephen Sweeney “Capital Dividends and the Requirement for ‘Absolute Payment'” Tax for the Owner-Manager 23:2 (April 2023)
