Paying dividends from a BC company: the resolution, the solvency test and the records

Paying yourself a dividend from your own company feels like moving money from one pocket to another. Under BC's Business Corporations Act it is a corporate decision with rules: who approves it, when it is not allowed, and what must be kept on file.

This guide walks owner-managers through the directors' resolution, the solvency test in section 70, the personal liability that follows a dividend paid when the company cannot meet its debts, and the records that belong in the minute book.

Who decides that the company will pay a dividend

Under BC's Business Corporations Act, the directors manage or supervise the management of the company's business and affairs (section 136). Company articles commonly give the directors the power to declare dividends, so the decision is usually made by a directors' resolution rather than by a shareholders' vote.

Your own articles and any shareholders' agreement are the first place to look. Some set extra conditions, such as shareholder approval for any dividend, a priority for one class of shares, or a rule that dividends on one class need the consent of another.

You do not need a formal meeting. Under section 140(3), a directors' resolution can be passed without a meeting if every director entitled to vote consents to it in writing, and a signed consent resolution is treated as valid as one passed at a meeting. If you are the only director, section 140(4) lets you constitute a meeting on your own, but the decision still needs to be recorded.

What the dividend resolution should say

The Act is flexible about how a dividend is paid. Section 70(1) allows a company to declare and pay a dividend out of profits, capital or otherwise, by issuing shares or warrants, or in property, including money. Because of that flexibility, the resolution should spell out exactly what was decided:

• The class of shares. Name the class (and series, if any) that receives the dividend. Whether you can pay one class and not another depends on the special rights and restrictions attached to each class in your articles.
• The amount. State the amount per share or the total, and confirm it matches the number of shares actually issued in that class.
• Who is entitled. Identify the shareholders of record on a stated date, so there is no doubt if shares change hands.
• When and how it is paid. Give the payment date and whether it is paid in money, property or shares.
• The solvency confirmation. Record that the directors considered the company's ability to pay its debts before approving the dividend.

A short, accurate resolution signed before the money moves is far easier to defend than a document drafted months later to match bank transfers.

The solvency test in section 70

The key legal limit is in section 70(2). A company must not declare or pay a dividend in money or other property if there are reasonable grounds for believing that the company is insolvent, or that paying the dividend would make it insolvent.

"Insolvent" has a specific meaning in section 1 of the Act: unable to pay the company's debts as they become due in the ordinary course of its business. That is a cash-flow test. A healthy balance of retained earnings on last year's financial statements does not answer it if the company cannot meet next month's payroll, rent, loan payments or tax remittances after the dividend leaves the account.

Before approving a dividend, look at what the company has to pay over the coming weeks and months, including CRA source deductions, GST/HST, supplier invoices and any lender covenants. If the answer is uncertain, a director can ask the court under section 70(3) to declare whether a proposed dividend would breach section 70(2).

Section 70(4) says a dividend is not invalid merely because it was paid in breach of the solvency test. That does not help the directors, as the next section explains.

When directors become personally liable

Section 154(1)(c) makes directors who vote for or consent to a resolution authorizing a dividend contrary to section 70(2) jointly and severally liable to restore to the company any amount paid that the company does not otherwise recover. The details matter for owner-managers who sit on a board with a spouse or business partner:

• Presence counts as consent. A director present at the meeting is deemed to consent unless their dissent is recorded in the minutes or delivered in writing as section 154(5) requires.
• Absence is not a shield. A director who missed the meeting is deemed to consent unless they deliver a written dissent to the registered office within 7 days after becoming aware of the resolution (sections 154(7) and (8)).
• A two-year window. A proceeding to enforce this liability cannot be started more than 2 years after the date of the resolution (section 154(9)).

Section 157 gives directors a defence if they relied in good faith on, for example, financial statements represented by an officer or in an auditor's written report to fairly reflect the company's financial position, or on a written report of an accountant or lawyer. In practice, that means asking your accountant for current figures before signing, and keeping what you relied on. For a wider view of directors' exposure, see our article on director liability in BC.

The records that belong in the minute book

Section 42(1) requires a company to keep, at its records office, the minutes of every directors' meeting and a copy of each consent resolution of the directors. A dividend resolution belongs there, alongside a note of the financial information the directors relied on.

Keep proof of payment as well. Under section 71, a shareholder's negotiation of a cheque or written acknowledgement of receipt is a valid discharge to the company for a dividend. A bank record showing the transfer, matched to the resolution, does the same practical job.

Gaps in these records tend to surface at awkward times: a bank review, a CRA question, a sale of the business or a dispute between shareholders. Our guide to what must be in a BC company's minute book explains the other records that should sit beside your resolutions.

Tax reporting and family shareholders

Dividends also carry tax filings. The CRA says a T5 information return must be filed by the last day of February following the calendar year to which it applies, so a dividend declared in December is reported within weeks.

If family members hold shares, the federal tax on split income rules can change how their dividends are taxed. Whether to pay a dividend, a salary or a mix is a question for your accountant; the corporate side, meaning the articles, share rights, resolution and records, is where a lawyer helps. Many owners find it simplest to handle dividends as part of the annual compliance routine for their company.

Paying yourself a dividend this year? Get the paperwork right first

Our business lawyers can review your articles and share structure, prepare the directors' resolution and bring your minute book up to date before the dividend is paid.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.