In a post I wrote last year, I stated
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.
In light of this comment, to make the CRA happy it might be prudent to have the payee sign a receipt accepting the note as payment of the dividend.
The Federal Court of Appeal, however, put the matter somewhat differently in Banner Pharmacaps NRO Ltd. v. The Queen, 2003 FCA 367, aff’g 2003 TCC 82. According to the Court, it is the intention of the payor that matters:
[7] [W]e respectfully disagree with the conclusion of the Tax Court Judge that, as a matter of law, a dividend cannot be paid by delivery of a promissory note. The legal effect of delivery of a promissory note depends upon all the relevant facts, the most important fact being the intention of the maker of the note as determined by the evidence. For example, in some circumstances a promissory note may be evidence of a debt to be paid at some future time. In other circumstances, delivery of a promissory note may itself be payment of a particular obligation.
[8] In the context of this case, the most important evidence is the resolution declaring the dividend. That resolution must be presumed to express the intention of Banner Canada because there is no evidence to the contrary. It states in the clearest possible terms that a dividend in the amount of $5,647,775 was to be paid on the date of the resolution, and that the dividend was to be paid by means of delivery of a promissory note in that amount. As the promissory note was in fact delivered as the resolution required, it is impossible to conclude that the dividend was not paid when it was supposed to be paid, on February 15, 1996. It follows that Banner was required to include the amount of the dividend in its income for its 1996 taxation year.
According to the Court, then, a lawyer should ensure that the dividend resolution includes appropriate language to ensure that a dividend is paid by way of the issue of a note.
