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Corporate Dividend Exclusion

Course: Investment Planning
Lesson 3: Equity Securities

Student Question:

I don’t quite understand the corporate dividend exclusion. A corporation can exclude 70% of dividends from a different company when they own less than 20%. I don’t understand what happens when they own more than 20%. Also, is there a rule preventing companies from investing in their competitors?

Thank you!
Alexandra

Instructor Response:

Hi Alexandra-

Great to hear from you.  Yeah, this is a little factoid not many people are familiar with.

You’ve got it correct when they own shares equal to less than 20% of the other company.  In that case, they can exclude up to 70% of those dividends from income.  If they own greater than 20% of the shares of the other company, they can exclude between 70% and 100% of the dividends from income.  So, it’s essentially a feature that allows corporations to purchase stock in other corporations and include little or no dividend payments as income.

Generally, there are no restrictions.  Utilities and the like – there are some restrictions.  But again, for the most part, no.

Let me know any other questions here!

Dan