Capital Dividend Accounts
Tools like a Capital Dividend Account (CDA) can help you and your business partners keep track of what goes into your business. We understand that – as the owner or partner of a corporation – you are keeping your finger on the pulse of everything that is going on. We’re available to help you determine the strategies and tools that will let you focus on what is most important, including setting up and optimizing a Capital Dividend Account.
Common questions business owners ask about CDAs.
What is a Capital Dividend Account (CDA)?
A Capital Dividend Account, or CDA, is a particular notional tax account that tracks tax-free amounts received by private corporations in Canada. The CDA can play a significant role as you put your estate plan together.
The CDA tracks things such as:
- Death benefit proceeds from a life insurance policy
- Non-taxable portions of capital gains/losses realized from the disposition of capital property, and
- Capital dividends received from other private corporations
The Capital Dividend Account calculation is described in Canada's Income Tax Act. The surpluses accumulated in this account can be distributed to Canadian resident shareholders of the corporation in the form of a tax-free capital dividend.
Regarding a CDA and taxes, the CDA supports the fundamental principle of tax integration in Canada regarding taxing private corporations and their shareholders. Integration attempts to recognize that income earned by a private corporation and then distributed to shareholders as a dividend should be subject to approximately the same amount of tax as if the income had been earned by the shareholders directly.
How does my corporation track the Capital Dividend Account?
If your private corporation has received proceeds from an insurance policy due to the death of a person, the Capital Dividend Account tracks it. Tax-free death benefit life insurance proceeds received by your private corporation can significantly increase the CDA balance. The insurance proceeds above the adjusted cost basis (ACB) of the policy and can be distributed to your shareholders tax-free, including the estate of a deceased shareholder.
The Capital Dividend Account calculation considered existing loans. If any outstanding loans are associated with the policy, the death benefit less the outstanding loan balance goes to the corporation. In this case, even though your corporation would receive a reduced amount of proceeds (death benefit minus outstanding loan), the CRA credits the Capital Dividend Account with the full death benefit less the ACB of the policy. This allows any of your remaining shareholders to receive future corporate dollars trapped inside the corporation as a tax-free capital dividend. Using the benefits derived from the Capital Dividend Account and life insurance in conjunction can be a powerful planning tool for you as a business owner as you plan for your business's future.
We understand the Capital Dividend Account calculation can be complex. Our advisors can assist with a strategy to navigate a Capital Dividend Account alongside any CRA requirements.
Learn how a CDA can help with estate taxes.
We’ll work with your family and your essential advisors to make sense of complicated times and get the most out of your Capital Dividend Account and life insurance. Get in touch today to see how we can help you plan your future.