Tax on Cumulative Dividends in Arrears

[mcliu]

Quick question, if you owned cumulative preferred shares, would you still be liable for the tax on the potential dividend even if it's in arrears? (Is there a difference if you're in Canada vs. U.S.?

[compoundinglife]

I know in some cases in the US they can issue you a 1099-OID. This happened to me with Ford Series S prefs that I owned: http://www.costbasis.com/stkchanges/preferredstockoid.html

[StubbleJumper]

I've never heard of a tax liability for divvies in arrears.  Generally, it would seem to run contrary to the doctrine of constructive receipt.

 

 

SJ

[compoundinglife]

I guess in the case of the Ford Series S Prefs, they were cumulative hybrids that paid "interest" instead of "dividends". So when they went into arrears they were treated like a zero coupon bond. It sounds like this is probably a rare case and in most situations a pref with a "dividend" in arrears, the arrearage would not be taxable until paid.

[smreitz]

I know for US taxpayers, the general rule states that they are 'cash basis' in the sense. If they have not constructively received access to use the income then it is not taxable (general rule).

 

OID interest is calculated in some cases, but the OID is suppose to increase your cost basis in the instrument so you are not subject to double taxation.

 

I would assume you are not taxed (yet) on the dividends in arrears.

 

If you want to make sure, you could contact the company to see if they issue tax forms (1099's) for shareholders in your situation.

[compoundinglife]

Thanks for pointing the addition to cost basis in the case of OID, forgot about that important aspect of it.