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Dividends in Kind

Many corporations retain a portion of their earnings and pay the remainder as a dividend. Dividends in kind are paid when instead of distributing cash, the corporation distributes assets such as shares of other corporations to its shareholders in proportion to their holdings of shares.  However, a dividend in kind does not include the corporation’s own stock or rights to acquire such stock.  A dividend in kind is treated the same way as a cash dividend for the recipient shareholder.  When a corporation declares a dividend to its shareholders, a liability is created to each of those shareholders.

The following are included as dividend in kind:

  • Government bonds
  • Bonds of the distributing corporation
  • Promissory notes from customers or other buyers of corporate assets
  • Assumption of a shareholder’s indebtedness
  • Bonds of another corporation
  • Accounts receivable
  • Real property
  • Services provided by the corporation; and
  • Options to gain stock in another corporation.

If the dividend paid is by a transfer of an asset of the company, the liability to the shareholder receiving the assets is lowered to the extent of the value of the asset.   Therefore, this transaction meets the requirement of a sale and the shareholder in consideration of the transfer of an asset by the company pays the dividend or the reduction in the value of shares held by him/her.  Therefore, the shareholder is required to pay tax on the value of the asset so transferred.

Inside Dividends in Kind