What options does a corporation have for paying and reporting dividends?
Many business owners prefer to pay recurring dividends according to a pre-determined schedule: For example, the 1st and 15th of each month. However, section 171 of the BC Business Corporations Act contains provisions that impact how a corporation can schedule the payment of recurring dividends.
Two common methods used by business owners to pay recurring dividends present different issues.
The first method is to prepare a directors’ resolution at the beginning of the year authorizing dividends to be paid over the next year according to a pre-determined schedule. For example, the resolution would state that dividends are to be paid on the 1st and 15th of each month until the corporation’s year end. While this approach seems efficient, section 171 of the BC Business Corporations Act states that a corporation cannot record the payment of a dividend more than 2 months before the payment actually occurs. Using the example above, if a directors’ resolution is passed on January 1st and establishes bi-weekly recurring payments for the remainder of the year, only dividends paid up until March 1st are acceptable under the BC Business Corporations Act.
The second method is to prepare directors’ resolutions for each recurring dividend. Using the example above, the directors would pass resolutions every 2 months authorizing dividends to be paid for the next 2 months. Unlike the first method, this second method is allowed by law. However, it does present some practical challenges for business owners, including the following:
- Adding resolutions every 2 months increases business owners’ record keeping burden;
- Additional resolutions increases the chance of a mistake or missed dividend; and
- If the corporation uses professional advisors, such as lawyers and accountants, preparing resolutions may create unnecessary costs.
There is an alternative method that avoids the issues presented by section 171 of the BC Business Corporations Act and authorizes recurring dividends in an efficient manner. Business owners can prepare a directors’ resolution at the beginning of the year confirming the intention to pay recurring dividends and state that the dividends will be formally recorded following the corporation’s year end. Then, at year end, the corporation would prepare ratifying resolutions confirming the dividends declared and paid in that year. This third method is acceptable under the law and eliminates the expense and inconvenience of preparing multiple resolutions.
If you would like more information on recurring dividends, please call our friends at Magellan Law Group (778-726-0175) as they are the authors of this week’s FAQ.