Cash Distributions vs. Dividends in Canada

by Jack Ori

Canadian businesses may distribute both property dividends and cash dividends to stockholders. If the stockholder lives in another country, he is subject to Canadian tax laws as well as the laws in his own country when he receives a dividend. Canadian businesses must withhold taxes from cash distributions, but the rules vary when it comes to property dividends, based on how much the property is worth and how much money the business has on hand.

Non-Resident Withholding

Canada withholds taxes on non-residents' cash distributions from investments. As of the time of publication, Canada withholds between 15 percent and 25 percent of cash dividends before distribution. U.S. residents have a reciprocal treaty with Canada, which allows them to pay taxes of only 15 percent on their dividends, rather than the full 25 percent Canada is allowed to withhold from non-residents' income.

Property Dividends

Both Canada and the United States consider property dividends to be the same as cash distributions if the company has the financial ability to cover the value of the property it gives away. Thus, if a company gives stockholders property instead of cash, the property is usually taxed the same way cash dividends in the amount of the property's value would be taxed. If the company does not have enough funds to cover the value of the property, the excess value is considered a capital return and taxed under capital return laws rather than dividend laws.

Tax Credit

If Canada withholds taxes on cash dividends, the investor may list the withholding as taxes already paid on his U.S. tax return, according to Penn West. However, this rule only applies if the taxpayer receives dividends directly. If the investment comes from retirement account funds or other tax-deferred accounts, the investor may not list taxes that Canada withholds as taxes already paid.

Capital Returns

Canada does not withhold tax from capital returns. Investors must list capital gains and losses separately from their other income. Your financial statement from the company should list the amount of dividends that were paid as capital returns as well as how much you were paid in cash dividends and in interest payments.