The Big Dividend at Year End? Some Considerations

Some may be considering the payment of large dividends prior to the commencement of the new Canadian income splitting tax rules which are scheduled to commence January 1, 2018. The following are some cautions and questions that could be posed prior to a declaration. Many of the points also hold true for the payment of large lump sum dividends in general.

1)     How will this impact the recipient’s income tested benefits? (e.g. Old Age Security, Canada Child Benefit, nursing home subsidies, etc.)

2)     How will this impact personal/familial issues? (e.g. relationship changes, lifestyle changes, residency changes, will it “wreck the kid”?, etc.)

3)     Will this dividend impact the reasonability of future dividend payments? (depends on final income splitting tax change legislation originally proposed July 18, 2017)

4)     What is the recipient’s current marginal rate and to what extent will it increase it? How does the current year tax liability compare to potential future taxation at top marginal rates?

5)     How will the spike in income impact tax compliance and administration duties (e.g. installment payment changes, increased risk of audit and compliance costs, etc.)

6)     Will this subject the recipient to Section 160 joint and several tax liability, or other corporate debt liability?

7)     How will this affect bank covenants or other agreements of the corporation?

8)     Can this level of dividend be paid under corporate law, and/or corporate liquidity requirements?

9)     The Department of Finance has stated that “current investments and associated income” will be grandfathered under the proposed passive investment rules. Legislation and explanatory notes are intended to be released as part of the 2018 Federal Budget. Will the payment of dividends reduce assets that would have otherwise been grandfathered?

10)  Will there be sufficient future assets to recover future RDTOH (refundable dividend tax on hand)? Is there sufficient GRIP (general rate income pool) to pay out an eligible dividend?

11)  Is the right corporate structure and class of shares in place so as to pay the desired dividend? (e.g. do we want to, or can we, pay a dividend to one person to the exclusion of others?)

12)  As the final legislation effecting the July 18, 2017 proposals have not been released, there is still some uncertainty as to the detailed rules. Is pre-emptive action worth the risk given the uncertainty?

And finally, just to reiterate, the applicability and significance of several of the concepts discussed above are dependent on the final legislation relating to the July 18, 2017 proposals. Proceed with caution!