Effective Dating Vs. Backdating

As a result of the new income splitting legislation released on December 13, 2017 , 2017 is the last year for many taxpayers in which dividends could be “sprinkled” to adult family members without attracting tax on split income (“TOSI”).  As a result of the new rules, income sprinkling using dividends will likely attract more attention from the Canada Revenue Agency’s (“CRA”) audit department going forward. Therefore, it is important to properly document dividends paid in 2017 and subsequent years.


There is no definition of “dividend” in the Income Tax Act,[1] Ontario Business Corporations Act[2] or the Canada Business Corporations Act.[3]  According to common law, a dividend is the share of profits that a corporation may allocate to its shareholders.  Dividends must be declared before they are paid and once they are declared they cannot be rescinded.  Directors declare and pay dividends.  At year end, some taxpayers may wish to characterize cash withdrawals or other amounts as dividends for accounting or tax purposes. Taxpayers will ask lawyers to draft corporate resolutions on the basis that a dividend was declared in the prior year.  The CRA and the Tax Court of Canada recognize that a transaction may be “papered” after the fact, but that backdating is improper where it alters the characterization of a transaction or reality.


There is a range of conduct from effective dating (which is acceptable) to inappropriate backdating (which is not). Effective dating is acceptable where it is transparent and it is meant to paper a true agreement after it occurred.  Backdating is inappropriate where is rewrites history or re-characterizes a transaction.

[1] RSC 1985, c 1 (5th Supp).

[2] RSO 1990, c B.16.

[3] RSC 1985, c C-44.