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.

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.