Timing after a capital gain
Later capital losses reduce the CDA. After a corporation realizes a gain, it's often worth discussing whether to pay out the CDA balance before losses can erode it.
Capital Dividend Account (CDA)
Capital Dividend Account Planning for Private Corporations
The CDA tracks amounts a private corporation can pay to its shareholders as tax-free capital dividends. Your accountant keeps the balance; we help make sure your planning puts it to use.
What It Is
A running tally of amounts that can leave tax-free
The Capital Dividend Account is not a bank account. It's a notional balance that Canadian private corporations keep to track certain tax-free amounts the corporation has received.
The idea is fairness. If you earned a capital gain or received a life insurance death benefit personally, part or all of it would reach you tax-free. The CDA lets the same amounts pass through a corporation to its shareholders without becoming taxable along the way.
When the corporation elects to pay a dividend out of its CDA, Canadian-resident shareholders receive it as a capital dividend, which is not taxable to them.
What adds to the CDA
- The non-taxable half of capital gainsNet of the non-allowable half of capital losses
- Life insurance death benefitsMinus the policy's adjusted cost base
- Capital dividends receivedFrom other corporations
- Less capital dividends paidEach payout reduces the balance
Paying a Capital Dividend
How a capital dividend is paid
Your accountant handles these steps. Getting them right matters, because mistakes are expensive.
Confirm the balance
Your accountant calculates the CDA. The CRA can confirm a balance on request.
Directors' resolution
The board resolves to pay the dividend and to elect it as a capital dividend.
File the election
Form T2054 goes to the CRA by the earlier of the day the dividend is paid or becomes payable.
Pay the dividend
Shareholders receive it as a capital dividend, which isn't taxable to Canadian residents.
Planning Points
Where CDA planning makes a difference
Corporate-owned life insurance
A death benefit received by the corporation can be one of the largest CDA credits a family ever sees. Only the amount above the policy's adjusted cost base is credited, and that cost base usually declines over time.
Holding company structures
The CDA credit belongs to the corporation that receives the gain or the insurance proceeds. Getting it to the shareholders may mean paying capital dividends up a chain of companies, so ownership should be planned in advance.
Estate planning
After death, insurance proceeds and the CDA are often used together in post-mortem planning to reduce the tax on a deceased owner's shares. That design belongs with your accountant and lawyer, and we provide the insurance side.
Don't over-elect
If a corporation elects a capital dividend larger than its CDA balance, the excess is subject to a 60% tax unless the corporation elects to treat it as a taxable dividend instead. Confirm the balance before every election.
How We Work With Your Accountant
Your accountant leads the tax side
The CDA calculation and election are your accountant's work. We make sure the insurance and investment pieces of your plan are designed with the CDA in mind.
We review the picture
Corporate investments, any corporate-owned policies, and how proceeds would reach your family.
Your accountant confirms
They confirm the CDA balance, the structure and the timing of any capital dividends.
We fill the gaps
Where insurance or investment changes would help, we design and implement them with your accountant's sign-off.
Common Questions
Questions owners ask about the CDA
For Canadian-resident shareholders, a properly elected capital dividend is not taxable. Non-resident shareholders are treated differently, so check with your accountant if any shareholder lives outside Canada.
Ask your accountant, who tracks it from the corporation's history of gains, losses, insurance proceeds and dividends. The CRA can also confirm a balance on request.
Only a death benefit received by the corporation, and only the amount above the policy's adjusted cost base. Early in a policy's life, the adjusted cost base can be high, so the credit can be smaller.
The excess is subject to a 60% tax unless the corporation elects to treat it as a taxable dividend. That's why the balance should be confirmed before every election.
Often it's worth considering, because future capital losses reduce the balance. Whether it makes sense depends on the corporation's cash needs and your wider plan, so decide it with your accountant.
Related Guides
Strategies that often work together
Corporate-Owned Life Insurance
Permanent coverage owned by the corporation, with tax-sheltered growth and CDA planning.
Read the guideCorporate Insured Retirement Program
A leveraged concept that borrows against a corporate-owned policy to supplement retirement cash flow.
Read the guideFor Accountants
How we work alongside you on your owner-managed clients.
Read the guideThis information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances.
CDA and corporate planning in Burlington, Oakville, Mississauga and Hamilton
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