What is a dividend?

A dividend is a portion of a company's profits paid to its shareholders. It's how a business shares its earnings with the people who own it. Dividends improperly designated by a corporation can be subject to additional tax.

The word dividend comes from dividing, in this case among shareholders. Companies aren't required to pay them. The board of directors decides whether to issue one based on the company's financial position.

Some federally regulated financial institutions must notify the Superintendent of a dividend declaration at least 15 days before payment.

How do dividends work?

Dividends move from company profits to shareholder accounts through a structured process that the board of directors controls. Here's how it typically works:

The board reviews finances: directors assess profits, cash reserves, and future needs.
A dividend is declared: the board announces the amount and the key dates.
Shareholders are identified: the company records who owns shares on the record date.
Payment is distributed: shareholders receive the dividend on the payment date.

The board decides whether to issue dividends, how much to pay, and when. Most companies follow a regular schedule:

Quarterly dividends: Paid 4 times a year, common among larger corporations.
Annual dividends: Paid once a year, often after the annual general meeting.
Interim dividends: Issued at any point during the year based on current performance.

Not every profitable company pays dividends. Some reinvest earnings to fund growth instead. The decision depends on strategy, financial position, and shareholder expectations.

Why do companies pay dividends?

Companies pay dividends to share profits with shareholders and to signal financial health. A mature business with steady revenue is more likely to issue dividends, while a growing company may reinvest surplus cash. Common reasons include:

Rewarding shareholders: Returning value to the investors who own part of the business.
Signalling stability: Showing consistent profitability and financial confidence.
Attracting investors: Making shares more appealing to those seeking regular income.

Implications of issuing dividends

Paying dividends affects your cash, your shareholders, and your reporting duties. Consider these factors before you issue one:

Reduced cash reserves: Funds paid out are no longer available for operating expenses or capital investments.
Tax obligations for recipients: Shareholders pay income tax on the dividends they receive.
Reporting requirements: You must declare dividends paid, and the CRA charges a penalty for late filing of the T5 information return, ranging from $100 to $7,500.

Types of dividends

Dividends can be delivered in several forms, depending on what the company chooses to distribute. The main types are:

Cash dividends: The most common type, where shareholders receive a set amount for each share they own.
Stock dividends: Additional shares issued to existing shareholders instead of cash.
Property dividends: Non-cash assets distributed to shareholders, though this is rare.
Special dividends: One-time payments made outside the regular schedule, often after an unusually strong year.
Preferred dividends: Fixed payments made to preferred shareholders before common shareholders are paid.

The company decides how much to pay per share, and shareholders collect that amount for each share they hold.

Understanding dividend dates

Timing decides who qualifies for a dividend and when the money arrives. These 4 dates determine your eligibility and payment:

Declaration date: When the board announces the dividend amount and payment schedule.
Ex-dividend date: The cutoff for buying shares and still receiving the dividend. This date is tied to the trade settlement cycle, and in May 2024 Canadian markets moved to a T+1 settlement cycle, so trades settle one day after the trade date. If you buy on or after this date, you won't qualify for the payment.
Record date: When the company checks its records to identify eligible shareholders.
Payment date: When the dividend is deposited into shareholder accounts.

If you're buying shares specifically for dividend income, purchase them before the ex-dividend date to qualify for the upcoming payment.

How dividends are calculated

Calculating your dividend is straightforward: multiply the dividend per share by the number of shares you own.

Dividend received = Dividend per share × Number of shares

To find your annual dividends, add up all the payments you received during the year.

Before setting a dividend per share, a company weighs how much it can afford to distribute. It usually considers these factors:

Annual profits: The amount the business earned after expenses.
Business equity: The company's overall financial position and reserves.
Budgeted expenditure: Planned spending and investments for the coming year.

Once the board agrees on a total payout, it divides that amount by the number of existing shares to set the dividend per share.

Dividend calculation example

A worked example shows how the numbers come together in practice.

Example: Waldo Manufacturing made a net after-tax profit of $10 million. It keeps $5 million for capital investments and distributes the remaining $5 million as dividends across 100,000 shares.

Step 1: Calculate dividend per share. $5,000,000 ÷ 100,000 shares = $50 per share.

Step 2: Calculate your dividend. If you own 10 shares: $50 × 10 shares = $500.

You would receive $500 in dividends.

Dividend yield and payout ratio

Two simple ratios help you judge how much a company returns through dividends. Both are quick to work out from figures a company reports.

Dividend yield shows the annual dividend per share as a percentage of the current share price. The dividend payout ratio shows what share of net income a company pays out as dividends.

Dividend yield: annual dividend per share ÷ share price, shown as a percentage
Dividend payout ratio: dividends paid ÷ net income, shown as a percentage

Tax implications of dividends

Dividends are taxable income in Canada, but they're taxed differently from regular earnings. The dividend tax credit reduces the tax Canadian shareholders owe through a process called the dividend gross-up. The gross-up is 38% for eligible dividends and 15% for non-eligible dividends, and different federal credit rates apply to each.

The treatment depends on the type of dividend you receive:

Eligible dividends: Paid by large Canadian corporations and receive a higher tax credit.
Non-eligible dividends: Paid by smaller Canadian-controlled private corporations and receive a lower tax credit.
Foreign dividends: Taxed as regular income with no Canadian dividend tax credit.

If you issue dividends as a business owner, the rules work a little differently:

Corporate tax applies first: Your company pays tax on its profits before distributing dividends.
No payroll deductions: Unlike salary, dividends don't require CPP contributions or EI premiums.
Reporting requirements: You issue T5 slips to shareholders and report dividends to the CRA. You don't need a T5 slip if the total annual dividend to one recipient is less than $50.

Tax rules can get complex. Work with an accountant to find the most tax-efficient way to pay yourself or distribute profits to shareholders.

Paying yourself: salary vs dividends

How you pay yourself as an owner affects your tax, your retirement savings, and your company's books. You can take a salary, dividends, or a combination of both.

Salary: Triggers CPP and EI contributions, is deductible to the company, and builds RRSP room.
Dividends: Come with no CPP or EI, are paid from after-tax profits, and don't build RRSP room.

Many owners use a mix of both. Speak with an accountant to find the right balance for your situation.

Dividends vs capital gains

Dividends provide regular income, while capital gains offer potential profit when you sell shares at a higher price. Each approach suits different goals:

Dividend-focused investors: Seek steady, predictable income from established companies with reliable payouts.
Growth-focused investors: Prefer companies that reinvest profits to increase share value over time.

You can benefit from both. Some investors hold dividend-paying shares for income while also investing in growth companies for long-term gains.

Track dividends with accounting software

Managing dividend payments means tracking shareholder records, calculating amounts, and meeting reporting deadlines. Cloud accounting software can help simplify this process. With the right tools, you can:

Record dividend payments accurately for each shareholder and payment date.
Generate T5 slips and other required tax reports.
Monitor how dividend payments affect your available cash in real time.

Xero's cloud accounting software helps you track dividends and manage your business finances. Sign up and get one month free.

FAQs on dividends

Here are answers to frequently asked questions about dividends.

Do dividends make you money?

Yes. Dividends provide regular income without selling your shares, and you can spend or reinvest them.

How often are dividends typically paid?

Most companies pay quarterly, though some pay annually or monthly. The schedule depends on the company's policy and board decisions.

What happens if a company can't pay dividends?

A company can reduce or suspend dividends at any time, since they aren't guaranteed. The board may redirect funds to cover expenses or invest in growth.

How are dividends different from salary for business owners?

Salary requires CPP and EI deductions, while dividends don't and are paid from after-tax profits. Many owners use a combination of both.

Do I need to report dividends on my tax return?

Yes. Canadian residents report all dividend income, using the T5 slip issued by the paying company.

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.

What is a dividend?

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