What differentiates dividends from policyholders and dividends from shareholders?

Dividends for policyholders and dividends for shareholders serve different purposes and are treated differently in terms of taxation and distribution.

Policyholder dividends, which are often associated with mutual insurance companies or participating life insurance policies, are typically not guaranteed and are related to the performance of the insurer. These dividends may be considered a return of premium and are generally not taxed in the same way that dividends for shareholders are. This tax treatment stems from the fact that policyholders do not buy insurance with the intent of receiving dividends as a return on investment but rather as a form of risk management.

In contrast, dividends paid to shareholders are treated as taxable income. Shareholders receive dividends as a return on their investment in the company's equity, which is typically paid out of profits after taxes have been applied.

Understanding this distinction is crucial in comprehending how different financial instruments operate and their implications for taxpayers in BC and the broader Canadian context.