In Canada why do we have to pay tax on in-kind dividend when the co. keeps the cash?

Answer 1

A dividend of any sort is paid out of a corporation's after tax income; the corporation has already paid the tax on this dividend.

A dividend in kind is taxable in the hands of the person receiving the dividend exactly like a dividend in cash. The affect on the corporation is that if they pay the dividend with property that is subject to capital gains, they will be deemed to have disposed of the property at fair market value, and, often, the corporation will actually have to include 1/2 of the gain in income.

Answer 2

It brings cash to the Government and the companies.

Interest, dividend and most other payments made to a non-resident of Canada are subject to withholding tax under the Canadian Income Tax Act.

Aprile v The Queen

In the recent Tax Court of Canada income tax case of
Aprile v The Queen the court allowed the taxpayer
to deduct $7,000 in expenses paid to his 11 and 13 year old sons. The taxpayer testified as the exact duties performed by each son, including the number of hours worked. He also testified that he paid his sons in kind rather than by way of cheque.

It reduces the family’s overall Canadian income tax liability.

If you transfer money to a minor child earns and it earns capital gains instead of interest or dividends, the capital gain would be reported on your child's tax return, not on yours, thereby reducing the family’s overall Canadian income tax liability.

Check the Tax webpage.

Have a pleasant day.