Dividend Journal Entries for a Canadian Corporation

How do you enter a dividend in the books when the corporation declares it?

When the directors declare a dividend, the journal entry is a debit to retained earnings (the dividends declared line) and a credit to dividends payable for the full amount. No expense is booked, so the income statement does not change. The entry records a promise to pay; no money has moved yet.

In your ledger, the debit can go to a separate dividends declared account in equity during the year, closed to retained earnings at year-end. The CRA's GIFI list reports it on one line either way: dividends declared, in the retained earnings roll-forward.

A dividend starts with a declaration, not a transfer. The CRA describes a dividend as a pro rata distribution (in proportion to shares held) among the holders of a class of shares where the corporate-law requirements are met, and says the name a corporation gives a distribution does not change what it is (folio S3-F2-C2, para 2.17). To move money from the corporation to yourself as a dividend, the order is declare, record, then pay. How to declare and what the resolution says is in declaring and paying a dividend.

A case is not simple when there is more than one shareholder or share class, retained earnings are thin or negative, the owner's account has run in debit, money left the bank before anything was declared, or the corporation is in Quebec. In those cases what each payment really was decides the entries, so have the books reviewed before you post, not after the T5 is filed. Gather before posting:

• The signed resolution, with the date, amount, share class and whether it is eligible
• Bank statements showing each payment
• The shareholder account ledger
• Last year's closing retained earnings
• The share register, and the T5 or its draft

What is the entry when the dividend is paid from the bank account?

When the dividend is paid by cheque or transfer, debit dividends payable and credit the bank. The payment clears the liability. Retained earnings were already reduced at declaration, so debiting retained earnings again would count the dividend twice.

Match each bank withdrawal to a resolution. Where one exists, categorize the withdrawal to dividends payable in a bank feed, not to an expense or a draw account; where none does, see "What if the money left the bank before any dividend was declared?" below. Payments already posted as an expense or a draw should be checked against a resolution before they are renamed. If the dividend is paid in parts, dividends payable keeps the unpaid balance.

How do I record a dividend paid by crediting my shareholder account?

When the corporation credits the owner's account instead of paying cash, debit dividends payable and credit due to shareholder. The liability moves from dividends payable to the shareholder account: the corporation still owes the money, now to the owner as a balance in the account, and no cash leaves the bank.

What this does to the balance depends on which way the account ran:

• The corporation already owed you, or the account was at zero: the credit adds to the balance owed to you.
• You owed the corporation: the dividend repays the loan. Credit due from shareholder for the amount you owed, so that balance clears, and credit due to shareholder only for the rest. The CRA accepts repaying a shareholder loan by applying a dividend against it (folio S3-F1-C1, para 1.82).

Where a credit to a shareholder's account is the payment of a dividend, the CRA says the amount received is the amount credited (folio S3-F2-C2, para 2.25). Whether a credit counts as payment is a separate question. An archived CRA bulletin on dividend refunds says a mere credit is not payment unless the shareholder can withdraw the amount at any time, while offsetting a debt the shareholder owes is payment (IT-243R4, para 5). That bulletin is archived and was written for the dividend refund, so it does not settle the T5 year by itself. If the owner cannot draw on the credit, whether the dividend was paid, and in which year, is a question to settle before the T5 is filed.

Which way the account should run, and how to clear a balance you owe, are in the shareholder loan account guide.

Declared, payable and paid: which date and which amount go in the books?

The declaration date and the payment date each get their own entry, and the amount is the cash dividend in the resolution, not a grossed-up figure.

The T5 adds a gross-up, a percentage added to the cash dividend, to reach a taxable amount (15% on a dividend other than eligible, 38% on an eligible one). That figure belongs on the slip and the personal return, not in the corporation's books (T5 guide).

If the dividend is declared and paid on the same day, the two entries can be posted as one: debit retained earnings (dividends declared), credit bank. Dividends payable ends the day at zero either way.

A dividend declared before the fiscal year-end and paid after it belongs in the earlier year's dividends declared and sits in dividends payable on that year-end balance sheet. The payment is booked in the next year, and one declared after year-end is the next year's entry. A taxable dividend is included in the recipient's income in the year it is received (folio S3-F2-C2, para 2.28), so the books and the T5 can fall in different years. See dividend before or after year-end.

Where does a dividend show: dividends payable, retained earnings and the GIFI codes?

A declared dividend shows in two places: dividends declared in the retained earnings roll-forward, and, until it is paid, dividends payable among current liabilities. The CRA's RC4088 lists the codes a corporation uses for the T2 financial statement schedules.

The roll-forward runs: start (3660), plus net income (3680), less dividends declared (3700), plus or minus any prior period adjustments (3720) or other items (3740), equals the end balance (3849). Net income and dividends are separate lines, so a dividend does not reduce net income.

How do I record eligible and non-eligible dividends so they tie to the T5?

An eligible dividend is a taxable dividend the corporation designates, which gives an individual shareholder an enhanced dividend tax credit; every other taxable dividend is non-eligible. The corporation designates by written notice to the shareholder at the time of payment (folio S3-F2-C2, paras 2.7, 2.53 and 2.58; CRA: designation). Book the cash dividend the same way for both types, and record the type on the resolution and in the ledger. The type decides which T5 boxes the amount goes in, not which accounts are used. The T5 uses box 10 for the actual amount of a dividend other than an eligible dividend and box 24 for the actual amount of an eligible dividend (T5 guide).

Keep dividends declared in the ledger by type, so the amount paid in each calendar year, by type, ties to the T5 boxes. The type should come from the resolution, not from habit: whether a dividend can be designated eligible, and what an excessive designation costs, is a tax question. See how much dividend income is tax-free.

What should the dividend, the T5 and retained earnings agree on at year-end?

Five checks tie the books to the T5. Work through them in this order.

A T5 slip is due by the last day of February after the dividend year (CRA: T5 due date). The CRA asks for a T5 when a corporation makes a dividend payment to a resident of Canada, except where the year's total to one recipient is under $50 (CRA: when to prepare a T5).

Totals can differ for good reasons. The books follow the fiscal year and the T5 follows the calendar year. A dividend declared and not yet paid is in the books but not on that year's T5. The T2 uses a third figure: a private corporation's dividend refund is based on taxable dividends paid in its fiscal year, not declared (Income Tax Act, subsection 129(1)), so keep that total too. Capital dividends are on the CRA's list of payments that do not need a T5 (T5 guide); one is not taxable to the shareholder only if the corporation elects on Form T2054 at or before the time it becomes payable (or the first day any part is paid, if earlier), and only up to its capital dividend account (subsection 83(2)). If the T5 is higher than the dividends paid in the books, and timing does not explain it, a payment may have gone unrecorded or been posted as something else, such as a loan, salary or an expense. For missing or late slips, see late employee and dividend slips. For the rest of the close, see the year-end checklist.

What if the money left the bank before any dividend was declared?

Money taken with no declaration is not automatically a dividend, a loan or salary; if it was none of these, it can be a taxable shareholder benefit (Income Tax Act, subsection 15(1)). The CRA looks at the substance of the transaction, not the label or the accounting entry (folio S3-F1-C1, paras 1.13 and 1.14; folio S3-F2-C2, para 2.17).

1. A common way to hold the withdrawal while this is sorted out is due from shareholder.
2. Check whether the corporation can properly declare a dividend now, under its own law and share terms. The declaration carries today's date; never backdate a resolution.
3. If it declares one (debit retained earnings, credit dividends payable), the dividend can then be applied against the balance: debit dividends payable, credit due from shareholder. The CRA's own example declares a dividend and applies it against an outstanding shareholder loan (folio S3-F1-C1, example 6).
4. Watch the clock. The loan rule excuses a repayment made within one year after the end of the corporation's tax year in which the loan was made, if it is not part of a series of loans and repayments.

Whether a taxable shareholder loan exists is in shareholder loans. If you cannot tell whether past withdrawals were a dividend, a loan, salary or a shareholder benefit, or several years are involved, get bookkeeping help before posting.

What if retained earnings cannot cover the dividend?

The entry is the same, and the debit can take retained earnings below zero, which the balance sheet then shows as a deficit. Whether the dividend was allowed is a corporate-law question that depends on the statute the corporation was incorporated under.

Neither test is stated in terms of retained earnings. Ontario and the other provinces have their own tests; declaring and paying a dividend compares Ontario's. A dividend that may fail the applicable test needs a lawyer's or CPA's review before it is declared; a bookkeeping entry does not fix it. Directors who vote for or consent to one that fails the test are jointly and severally liable to restore it to the corporation, and a claim must start within 2 years of the resolution (CBCA section 118; British Columbia section 154). See dividends with negative retained earnings.

Example

All amounts are Canadian dollars and illustrative.

Declared and paid by cheque

The board declares C$30,000 and pays it the same day.

• Entry 1: debit retained earnings (dividends declared) C$30,000, credit dividends payable C$30,000.
• Entry 2: debit dividends payable C$30,000, credit bank C$30,000.

Dividends payable ends at zero, dividends declared shows C$30,000, and net income is unchanged.

Paid by credit to the owner's account

The board declares C$20,000 and credits the owner's account instead of paying cash. The account was in debit: the owner owed the corporation C$5,000.

• Entry 1: debit retained earnings (dividends declared) C$20,000, credit dividends payable C$20,000.
• Entry 2: debit dividends payable C$20,000, credit due from shareholder C$5,000, credit due to shareholder C$15,000.

The C$5,000 loan is cleared. The corporation now owes the owner C$15,000, and no cash has left the bank. The C$5,000 applied to the loan is a payment; if the C$15,000 credit also counts as payment (see above), the owner's T5 shows the full C$20,000.

Two dividends across a year-end

A corporation with a December 31 year-end declares and pays C$10,000 on March 1. On December 20 it declares another C$10,000, paid on January 10.

• Year 1: dividends declared is C$20,000. Dividends payable is C$10,000 on the December 31 balance sheet. The T5 for the year shows the C$10,000 paid.
• Year 2: the January payment debits dividends payable and credits the bank. Nothing is added to dividends declared for it. The payment is generally reported on that year's T5.

If both had been paid in Year 1, the T5 would show the full C$20,000, the same as dividends declared.

Different for you?

• Your shareholder account will not tie after dividends, or its balance flips between owed to you and owed by you: each entry has to be sorted by what it really was, then the account restated. See the shareholder loan account guide and get help restating the account.
• Money left the bank before anything was declared: whether it was a dividend, a loan, salary or a shareholder benefit, and how to restate the entries, changes what the T5 and the T2 show. See shareholder loans and get bookkeeping help.
• There is more than one shareholder or class of shares: dividends on one class are pro rata, so unequal amounts need the right share terms first, and past unequal payments may need restating. See shareholders taking different amounts and have the past entries reviewed.
• Retained earnings are thin or negative: see dividends with negative retained earnings. If a dividend may already have been paid against the legal test, get bookkeeping help before posting.
• Years of dividends were never recorded, or T5s were never filed: see catching up on overdue books and get the books caught up.
• The corporation owes the CRA tax: a shareholder it does not deal with at arm's length who receives a dividend can be liable for that tax, up to the amount received, and the CRA may assess at any time (section 160). See owing tax after paying yourself dividends and get corporate tax help.
• You want the personal tax on the dividend: see tax on dividends from your corporation.
• A shareholder is not a resident of Canada when the dividend is paid or credited: it goes on an NR4, not a T5. The corporation must withhold Canadian tax (25% before any treaty reduction) and owes it itself if it does not (section 215), so the entries and slips differ. See non-resident owners of a Canadian corporation and get cross-border tax help.
• The corporation is in Quebec or the owner lives there: Quebec has its own rules, which this page does not cover. Have the entries checked before posting.