# Tax implications of Stock Dividend



## MrMatt (Dec 21, 2011)

TD has announced a stock dividend.
Is this simply a split, ACB is now divided by twice as many shares, or do you pay taxes on the issued share?


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## Guban (Jul 5, 2011)

No. Stock splits (or consolidations) are not taxable. You have twice as many shares, in the two for one split, worth half as much. Your ACB stays the same. Note that the dividend is an unrelated matter.


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## Cal (Jun 17, 2009)

And to clarify, TD announced both, an increase in the dividend that they pay out, and a 2-1 stock split coming in January.

As mentioned about the split, nothing changes. You end up with the same value of shares, just 2x as many, worth half as much. No tax implications at all.


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## P_I (Dec 2, 2011)

I posted this elsewhere but it might be helpful here as well. 

Using the National Bank press release -- National Bank of Canada | National Bank of Canada announces two-for-one share split by way of a share dividend.


> National Bank of Canada (the "Bank") (NA) announces today that its Board of Directors has approved a 2-for-1 share split of its outstanding common shares. This share split will take the form of a share dividend whereby shareholders will receive one common share for each common share held.
> 
> <snip>
> 
> No Canadian income tax will be payable by shareholders in respect of the share dividend, and the share dividend will not dilute shareholders' equity. All share and per share data for future periods will reflect the share dividend. For more information, shareholders and beneficial owners should consult their own tax advisor.


I notice that National Bank carefully refers to the action as a "2-for-1 share split" not a stock split. It brings up an interesting question about actual language, clearly it is related to tax treatment. It probably gets confusing because common usage seems to freely interchange _share split_ and _stock split_. Google turns up IT88R2 - Stock dividends | CRA


CRA said:


> A stock dividend is a dividend paid by the issuance of shares of the capital stock of the payer corporation. For stock dividends paid by Canadian resident corporations, the "amount" of a stock dividend is generally equal to the increase in the paid-up capital of the corporation by virtue of the payment of the dividend. This "amount" is included in the shareholder's income as an ordinary taxable dividend and is subject to the gross-up and dividend tax credit provisions. Shares received as a result of a stock dividend are deemed to have been acquired at a cost equal to the "amount" of the stock dividend. An exception to these general rules applied to certain stock dividends paid by public corporations between April 1, 1977 and May 23, 1985. These stock dividends did not constitute dividends and therefore were not required to be included in the shareholders' income. The shares so received were deemed to have been acquired at a cost of nil.
> 
> <snip>
> 
> 3. A stock dividend must also be distinguished from a stock split. The fact that a corporation may refer to a transaction as a stock split does not prevent the Department from looking behind the language used to determine its true nature. In a stock split, there is an increase in the number of shares accompanied by a proportional decrease in the legal paid-up capital per share so that neither the total amount of legal paid-up capital nor the total amount of surplus available for distribution as a dividend is altered. In a stock dividend, there is a distribution of shares accompanied by a capitalization of retained earnings or any other surplus account available for distribution as a dividend. For a discussion of the tax implications of a stock split, refer to the current version of IT-65 entitled, Stock Splits and Consolidations.


The link for the reference from the last sentence is IT65 - Stock splits and consolidations | CRA.

Clearly there is some arcane tax and/or accounting implications that drive the terminology. Based on past experience, I would suggest that for Canadian shareholders, the language semantics usually can be ignored as corporations structure these events so there is no taxable event. Whether or not it impacts non-resident shareholders is probably a topic for discussion with local tax advisors.


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## Cal (Jun 17, 2009)

http://www.theglobeandmail.com/glob...mpanies-are-doing-the-splits/article15807730/


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## Eclectic12 (Oct 20, 2010)

Just to be clear ... when most refer to a "stock dividend", they mean the cash dividend payment - which is taxable.

When they talk about a "split" or "reverse split" - the number of shares is changing, which will change the ACB per share, not the total ACB, without any tax implications. At least all of the Canadian company splits I've been party to - the company arranged it so that there wasn't a tax implication.

So if the split is a "2 for 1", then if one owns 100 shares, after the split one will own 200 shares. Since there are twice as many shares, the ACB per share has dropped in half but the total ACB will remain the same, assuming no buying/selling of shares happens.

If it's a reverse split that is "1 for 5", if then one owns 100 shares, after the reverse split one will own 20 shares. The ACB per share will increase five fold but the total ACB will remain the same, assuming no buying/selling of shares happens.


For better or worse, the terms sometimes aren't used consistently so it's good to make sure what is happening.


Cheers


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## My Own Advisor (Sep 24, 2012)

Good summary Eclectic.


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## Guban (Jul 5, 2011)

I found the information posted by P_I interesting. It seems to describe a stock dividend as a distribution of shares, perhaps instead of cash, as a dividend payment which is taxable. This is distinct from a split, which is not taxable. The globe link posted by Cal uses the two as if there is no distinction. 

I agree with Eclectic in that I am unaware of a Canadian company that has used a taxable stock dividend and I am confused as to why one would ever do so. Maybe there is less legal paperwork or filing required vs a split?


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## Eclectic12 (Oct 20, 2010)

Guban said:


> I found the information posted by P_I interesting. It seems to describe a stock dividend as a distribution of shares, perhaps instead of cash, as a dividend payment which is taxable. This is distinct from a split, which is not taxable. The globe link posted by Cal uses the two as if there is no distinction.


My understanding is the company can decide to go either route (and my concern that the investor be clear on which it is).




Guban said:


> I agree with Eclectic in that I am unaware of a Canadian company that has used a taxable stock dividend and I am confused as to why one would ever do so. Maybe there is less legal paperwork or filing required vs a split?


I'd expect the paperwork to be pretty similar. I suspect most companies are aware that most investors want their capital gains to be from selling, not distributions & structure changes such as this as a split.

I can recall reading about some of the newer, exotic type units/shares going the taxable stock dividend route so it seems rare.


Cheers


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## P_I (Dec 2, 2011)

CRA's wording is even more interesting "The fact that a corporation may refer to a transaction as a stock split does not prevent the Department from looking behind the language used to determine its true nature. " Generally companies are very aware of the tax implications of their decisions and they take every opportunity to help minimize the tax implication of their actions. 

It seems this is more a question of common language usage and the fact that investors, companies and the media seem to freely interchange stock dividend/stock split/share split. It wasn't until I did some digging did I come to understand there is the potential for them to actually mean different tax treatment. 

For most, the summary provided by Eclectic12 up-thread is probably all they need to know.


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## warp (Sep 4, 2010)

Remember that a company can declare a "stock dividend", meaning that instaed of cash, they pay their dividend in the form of new stock given to you.

This is NOT a stock split....it is simply paying a dividend in stock rather than in cash, and there are companies who do this.

And. as far as I know, this stock payment is considered taxable at its fair market value, ( much like when you drip a stock and get new shares, with your cash dividend payment)

Anybody who reads any of my posts on this Forum know how much I rail at our stupid, complicated, ridiculous, ludicrous, and insane tax system, and how we need to get to a Flat-Rate tax, plain and simple.


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## My Own Advisor (Sep 24, 2012)

All for flat-tax warp.


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