The Business Corporations Act (Ontario) (the “OBCA”) permits a corporation to buy back or otherwise acquire its own shares, redeem redeemable shares, and pay dividends, but these powers are subject to solvency and capital-protection rules. The OBCA restricts purchases, redemptions, commissions, and dividends where the corporation cannot pay its liabilities as they become due or where the realizable value of assets would be insufficient under the statutory tests.
This is a creditor-protection theme running through the OBCA. Shareholders may own the corporation economically, but corporate assets are not a free pool of money that can always be distributed. Before dividends, redemptions, or buybacks, directors should consider current and expected liabilities, financial statements, working capital, and contractual restrictions. A payment that feels routine can become a director-liability issue if the statutory tests are not met.
Our template dividend and capital dividend resolutions have the necessary language and solvency tests required under the OBCA, so that in coordination with your accountant you can be confident when you issue dividends or capital dividends that you are doing so in compliance with the OBCA.
The information in this post is intended to be legal information only and nothing in it should be interpreted as legal advice.