Dividends – the general principle
General Rules is that a member of a company may not get any money from the company qua member except in the form of dividends. Dividends may not be paid unless there are profits available for that purpose.
Note that a company can make profit on paper and still be in a cash short position. Refer to sec 365 of the Companies Act.
Dividends may be paid otherwise than in cash. They can be in the form of shares. These shares may be issued fully paid up to the members. Dividends are tax deductible under sec 108 of the Income Tax Act in arriving at the taxpayer’s taxable income. Therefore, it is commercially sensible to pay out dividends to shareholders whether in cash or shares.
