Capital dividend account (CDA) allows a private corporation to pay tax-free dividends to its shareholders.
CDA is a notional account and is only used for tax purposes. The CDA keeps track of certain types of income that can be paid by a private corporation tax-free. The balance in the CDA consists of:
Excess of non-taxable capital gains over non-deductible capital losses
Plus: non-taxable portion of capital gain on eligible capital property (for example: goodwill, trademark, patents)
Plus: non-taxable life insurance proceeds
Plus: capital dividend received from another corporation
Minus: capital dividend paid by the corporation
It is important to keep in mind that balance in the CDA account is reduced by the non-deductible capital losses. If a corporation foresees an incurrence of a capital loss it is advised that positive balance in the CDA be paid out as it becomes available. Doing so would allow the corporation to pay the maximum amount of dividend tax-free.
How to pay a capital dividend?
In addition to a capital dividend, private corporations under the Canadian tax system, can payout eligible and/or non-eligible dividends. Capital dividends are paid out from the capital invested in the corporation by its shareholders, whereas eligible and non-eligible dividends are paid out from the corporation’s retained earnings.
The CRA does not automatically consider a dividend payment is paid from CDA. Instead, the corporation needs to designate its dividend as a capital dividend. This is done by filing these documents with CRA:
- Form T2054, election for a capital dividend.
- Certified copy of the directors’ resolution declaring a capital dividend.
- A CDA schedule, showing how the balance is calculated.
These documents must be filed on or before the earlier of the date the dividend becomes payable and the first day on which any part of the dividend is paid.
For professional advice contact Alpha Accountzy, Accounting & Tax Solutions.
