[unknown]

Received this question:

Quote

I am a first time user and don't know where to go to post on the general board.

You are the most frequent poster so I thought I would ask you:

Is a ccpc allowed to declare and pay a dividend to its shareholders if there are no retained earnings (i.e. a deficit)? Done to pay div up to 33,000 and if no other income, it is tax free.

thanks in advance

[unknown]

When a corporation is in a deficit position, under corporate law it is not allowed to pay any dividend. So it will first have to generate retained earnings.

[Gordon Wiber]

Bert_Mulder_CGA, on Feb 12 2007, 05:10 AM, said:

When a corporation is in a deficit position, under corporate law it is not allowed to pay any dividend. So it will first have to generate retained earnings.

Not necessarily, under most business corporations act the test is one of solvency. Most definitions of insolvency, is the condition of one who is unable to pay his debts as they fall due.

Under Section 70(2) of Business Corporations Act (B.C.) – “A company may declare or pay a dividend under subsection (1) (B) unless there are reasonable grounds for believing that
(a) the company is insolvent, or
(B) the payment of the dividend would render the company insolvent.”
Under the same Section 70(4) - A dividend is not invalid merely because it is declared or paid in contravention of subsection (2).

Similar wording is found in section 42 of the CBCA – bit more restrictive as you have to consider realizable value of assets, which could also be higher than stated values on the balance sheet at the time of the dividend. Most other provincial business corporations act tend to have wording similar to the CBCA.

Arguably if you’re paying a dividend to a shareholder just to utilize NRTC, with no expectation of actually paying the cash in the short term, just increasing the shareholder loan, this action has not caused the company to be insolvent.

[unknown]

Of course you are right Gordon.

My answer was the quick, inexact answer

[JohnV]

This is the suggested wording for that particular aspect of a declaration resolution...I use it for both ordinary and capital dividends

In the opinion of Board of Directors of the Corporation, there are reasonable grounds for believing the Corporation is now and would after the payment of such a dividend be able to pay its liabilities as they become due and the realizeable value of the Corporation's assets after payment of such a dividend would be greater than the aggregate of its liabilities and stated capital of all classes.

Adhere to that and you should be fine....