Are you a shareholder of a non-arm’s length company and also employed for the same corporation? If so, you should think carefully before making an agreement where you are paid in dividends instead of being paid a salary or other form of compensation.
If dividends are distributed when the corporation has a tax debt, the CRA may find you personally liable under Section 160 of the Income Tax Act for the company’s tax debt.
Unlike other transfers of property, where a Section 160 assessment can be overcome by showing that the transfer was made for fair consideration, the courts have made it clear that this does not apply to dividends. Dividends are not issued for consideration, even if the employee/shareholder intended for this to be their salary.
What’s worse is that there is no time limit on when the CRA may make this Section 160 assessment, and the bankruptcy of the corporation doesn’t stop this assessment.
In such situations, the employee/shareholder may be better protected from the taxman if paid by way of salary, bonus, or other form of compensation (provided it is in consideration for the fair market value of the services rendered).
Making an arrangement where you are paid only by dividends may be risky. Any tax advantage may be outweighed if the company has a tax debt. The non-arm’s length shareholder/employee may be stuck footing the tax bill of the corporation and loosing out on any compensation, despite having provided services to the company.
Speak with a tax professional at Barrett Tax Law to make sure that your best interests are taken care of.