August 2016 Newsletter

Most dividends paid by corporations are paid in cash. However, there are times when a corporation will pay a stock dividend. This occurs where a corporation issues new shares as dividends to existing shareholders.

The amount of a stock dividend is generally the paid-up capital (“PUC”) of the issued share. Although PUC will sometimes be the same as the value of the share at the time it is issued, in many cases the PUC will differ from that value. Regardless, the PUC, not the value, determines the amount of the dividend for purposes of reporting the dividend as income.

If the stock dividend is received from a taxable Canadian corporation, it will be subject to the usual gross-up / dividend tax credit mechanism, which results in the dividend being subject to a lower rate of tax relative to other types of income such as interest.

Your cost of the issued share also is determined by the PUC of the share. The cost is then averaged out with the cost of your existing shares to determine your cost per share.


You own 100 common shares in X Ltd., with an aggregate cost of $900 or $9 per share. X Ltd. pays a 1% stock dividend on its common shares. This means you receive 1 common share as the dividend. The PUC of that share is $20.

You must include $20 in income, plus the applicable gross-up amount, and then proceed to compute your tax using the dividend tax credit.

The cost to you of the issued share is deemed to be $20, which must be averaged with the cost of your other 100 shares. The total cost of your 101 common shares is $920, which means you now have an average cost of $9.11 per share.

Last modified on August 10, 2016 12:00 am
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