If you are the owner of a corporation, you can choose to pay yourself (and other shareholders) dividends instead of a salary, or they can be paid in addition to a salary. If you do decide to pay yourself dividends, it is important to ensure that you prepare the proper documentation for Revenue Canada (CRA) and if you live in Quebec, Revenue Quebec. The documents are due by February 28th of the calendar year following the year in which the dividend was paid. And although no taxes are due at the time of filing with the government, interest and penalties apply for late payment. The documents that need to be filled out and returned to the CRA and MRQ are discussed below:
Note: This assumes that you are paying income taxes at the small business tax rate i.e. your net profits for tax purposes are less than $500,000. These are referred to as "dividends other than eligible dividends".
- Please note that the dividend rate changed effective 2014. The gross up is now 18 % and the tax credit is 11.017%
- Please note that the dividend rate changed effective 2016. The gross up for 2016 onwards is 17% and the tax credit is 10.5217%
You have to fill out both a T5 slip and complete the following boxes
- the actual amount of dividends on Box 10 of the slip
- the grossed up amount of dividends on Box 11 = amount of Box 20 X 1.25 (changed to 1.17 in 2016)
- the dividend tax credit on Box 12 = 13.33% X Box 11 (changed to 10.5217% in 2016)
For example if you pay yourself a dividend of $20,000 you would (please see changes in bold):
- Enter $20,000 on Box 10
- Enter $25,000 on Box 11
- Enter $3,332.50 on Box 12.
You will also need to enter the:
- payer's name and address
- recipient's name and address
- Report code – The code in this box indicates that this slip is the original ("O"), an amended ("A"), or a cancelled slip ("C").
- Recipient type – The code in this box indicates if the amount was paid to an individual ("1"), a joint account ("2"), a corporation ("3"), an association, trust, club, or partnership ("4"), or a government ("5")
- Recipient identification number – If you are an individual (other than a trust),the number in this box is your social insurance number. In all other cases, the number is your 9 characters Business Number.
The Quebec equivalent form is the RL-3. The information required is very similar to the T5.
The summary is fairly straightforward and is basically an aggregation of all the dividend slips. After entering the name, business number, address etc of the corporation you need to indicate:
- how many slips were filed
- add up the amounts per the boxes and indicate them on the appropriate line
The Quebec equivalent summary can be found at RL-3 Summary
- Payment of dividends should be recorded in the corporation minutes
- The CRA has fillable dividend forms i.e. the appropriate fields can be entered online and then printed out.
- Once completed the T5 slips and T5 summary should be mailed to the address indicated on Page 2 of the summary.
- Another copy should be kept for your records.
- A third copy should be given to the recipient(s) of the dividends to maintain with their tax return.
- The deadline for completion is February 28th after the calendar year in which the dividend was paid.
- No taxes are due along with the dividend.
- Interest and penalties apply for late filing. Returns filed late are charged a penalty of a $10 per day for which the minimum of $100 and the maximum of $1,000.
Before undertaking to file your T-5s, as always, it is good to get the advice of an accountant.
Ronika Khanna is a Montreal Accountant who helps small businesses achieve their financial goals. Should you need help preparing your T5/RL-1 summaries or for any other accounting or small business tax issues do not hesitate to contact her. To receive regular updates of articles pertaining to small business, accounting, tax and other topics of interest to business owners you can sign up here. You can also follow her on Facebook or Twitter