Short-term And Taxable Preferred Shares: Think Before You Dividend

Introduction

Dividend sits among the group of the most pleasant words in the English language. The crescendo of the single letter syllable in the middle of the word creates a satisfying enunciation when spoken. The connotation of the receipt of money or property from a corporation is always a pleasant thought. The alliterative phrase 'directors declare a dividend' is the perfect rhythm for such an auspicious occasion. Truly, dividend is an underutilized word in our collective library of songs, poems, and stories.

Despite the pleasant lilt of the word, unexpectedly painful tax consequences may lurk if the shares upon which a dividend is paid are either "taxable preferred shares" or "short-term preferred shares." A corporation that receives a dividend on taxable preferred shares it owns faces Part IV.1 tax of 10% under the Income Tax Act (the "Act").¹ Just like when we were children, the Act allows an annual dividend allowance to paying corporations of $500,000. A