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Dividends paid from a corporation to a 'holding' corporation

Expert: George Dube

Karen asked:

My husband has a corporation (corp1) which owns shares in another (corp2). Dividends are paid from corp2 to corp1 which 'hold' the funds. When we withdrawal these dividends from corp1 for personal use, what is the tax implication to my husband?

George Dube answered:

Generally speaking dividends paid to an individual will be considered taxable income. The tax rates involved will vary depending on, for example, whether or not the dividends are 'eligible,' the individual's other sources and amounts of income and the province of residency of the taxpayers.

Some special types of dividends are not taxable, and I am assuming that the 'attribution' rules are not applicable in this situation. The attribution rules can deem income received by one spouse to be taxable income of the other spouse.

For the specific tax implications you will need to discuss with your tax adviser as they will be familiar with your complete scenario which in turn influences the impact to your husband.

The corporate structure that you have described is commonly used in Canada. From your question, I assume that your husband is the only shareholder of corp1. So your next question is WHY? While there are a host of valid reasons why this may be the case, you may also be missing an opportunity to split income amongst family members today or in the future (potentially saving further taxes - plus there are other reasons to consider) and thus you should discuss this with your tax and legal advisers.

About the author

George Dube is a C.A. with Dube & Associates Professional Corporation, Chartered Accountants.

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