Capital dividend account (CDA)

What goes in and what comes out

The CRA lists the most common additions as the non-taxable part of capital gains (to the extent it exceeds the non-deductible part of capital losses), certain life insurance proceeds received on a death, and capital dividends received from other corporations. Capital dividends the corporation pays reduce the balance. The account is cumulative, so it reflects history, not just the current year.

Life insurance adds only the net proceeds, meaning the amount received after subtracting the adjusted cost basis of the policy and some other amounts. A capital loss can hold back additions: if the capital gains component is negative, later gains must first absorb it before anything is added.

How a capital dividend is paid

A capital dividend is not automatic. The corporation must file Form T2054 electing that the full amount of the dividend is a capital dividend. The deadline is the earlier of the day the dividend becomes payable under the directors’ resolution and the first day any part of it is paid. The election must cover the whole dividend, so one dividend cannot be part capital dividend and part ordinary.

The filing includes a certified copy of the directors’ resolution and a calculation of the CDA balance just before the election, which Schedule 89 can supply. A late election is possible with a late-filing penalty. Only a private corporation can pay one, and payments to non-residents are subject to 25% withholding, which a tax treaty may reduce.

A simple illustration

For illustration, a corporation sells an investment for a $40,000 gain. Half of the gain is non-taxable, so $20,000 is added to its CDA, assuming no capital losses and no other entries. It could elect to pay a capital dividend of up to $20,000. The tax on the taxable half still applies in the corporation. The figures are round and the half reflects the current inclusion rate, since the proposed increase was cancelled.

Electing too much

If the elected amount exceeds the balance, only the balance counts as a capital dividend. The corporation is subject to Part III tax equal to 60% of the excess plus interest, and the people who received the dividend are jointly liable for their share. An election can instead treat the excess as an ordinary taxable dividend, but it generally needs agreement from every shareholder entitled to a portion. Because reserves and other adjustments can change the balance, confirm it before you declare.

What to discuss with your accountant

Ask what your CDA balance is and whether the CRA has verified it. Balances can appear in My Business Account for corporations that filed a T2054 or asked for verification. Bring records of capital dispositions, insurance payments and past elections. Related pages are the general rate income pool and Part IV tax entries.