A deemed dividend is an amount the CRA treats as a dividend for tax purposes even though it was never formally declared, most commonly triggered by a shareholder loan that remains outstanding beyond the permitted period.

The Income Tax Act deems certain transactions to be dividends regardless of how they were structured. The most common trigger for private company owners is a shareholder loan: if an amount borrowed from a corporation is not repaid by the end of the fiscal year following the year it was received, the CRA deems the outstanding balance to be a taxable dividend, with no corresponding corporate deduction.

Other deemed dividend triggers include share redemptions where the redemption proceeds exceed the paid-up capital of the shares, and certain distributions on winding up. In each case, the tax consequence arises without a formal dividend declaration, which is why these transactions need to be reviewed with tax counsel before completion rather than reconciled afterward.

Deemed dividends arise from transactions that appear routine until reassessed by the CRA. See how Wefinx approaches tax planning.

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