New tax rules enacted earlier this year allow Canadian corporations to pay eligible dividends that are taxed at lower rates in the hands of individual shareholders as long as stringent notice requirements are met. These notice requirements are discussed below.

Eligible Dividends

Eligible dividends received by Ontario resident individuals in 2007 are effectively taxed at a top marginal tax rate of about 25% which will be reduced to approximately 22% by 2010, instead of about 31% for a regular dividend. Generally, both public companies and non-public or private companies may pay eligible dividends to the extent the income of the payor corporation was taxed at the general corporate rate.

The Notice Requirements

In order to pay an "eligible dividend" a corporation must designate the dividend as an eligible dividend by written notice at the time of payment to each person or partnership to whom it pays all or any part of the dividend.

A valid eligible dividend notice must:

a- be in writing

b- be made at the time the dividend is paid (i.e., on the same day); and

c- be given to each shareholder who is receiving the dividend.

There is no provision for a late designation.

Canada Revenue Agency ("CRA") Guidance on Giving Notice

The CRA issued a news release on December 20, 2006, providing guidance on fulfilling the notice requirements. Although administrative relief was provided to public companies (see below), the CRA confirmed that the notice requirements for non-public or private companies must be met for each shareholder for each eligible dividend designation. The CRA provided two examples of proper notification: (1) notice by letter to all shareholders; and (2) notice on dividend cheque stubs to dividend recipients. The news release also stated that, where "all" the shareholders of a company are directors, a notation in the minutes of directors would constitute sufficient notice.

The news release stated that public companies could fulfil the notice requirements by posting a designation on their website that made all future dividends eligible ones until further notice was given. Similarly, a notice in a public companyys annual or quarterly report sufficed as notice of the designation for all eligible dividends in that year or quarter.

At the Time the Dividend Is Paid

For non-public or private companies, the requirement to give notice of an eligible dividend designation at the time that the dividend is paid will require changes in the way dividends are often paid. A company wishing to pay an eligible dividend cannot document the payment of the dividend after the dividend is paid. Rather, notice of a designation must be given to shareholders at the time the dividend is paid that is, on the same day as the payment of the dividend.

Dividends Paid Before February 21, 2007

The notice requirements contain a grace period for eligible dividends paid after 2005 and before February 21, 2007. For these dividends, a designation will be considered to have been made on time if notice is given to dividend recipients before May 22, 2007. A review should be made of any eligible dividends paid before February 21, 2007 to ensure the proper notice has been given. For dividends paid during 2006 where the corporation issued a T5 slip to each shareholder, describing the dividend as an eligible dividend, the form should suffice as notice.

Dividends Paid After February 20, 2007

For dividends paid after February 20, 2007, no grace period is given and the notice must be given at the time the dividend is paid.

Deemed Dividends

There are a number of tax provisions that will give rise to deemed dividends (e.g., on a corporate repurchase or redemption of shares). These deemed dividends may also be designated as eligible dividends if the proper notice requirements are met.