Capital Dividend Account
What is the capital dividend account?
The capital dividend account (CDA) tracks the amounts that can be paid out to shareholders, tax free.
How is the capital dividend account balance created?
- Capital gains and losses – The balance increases by 50% of any capital gains your company incurs, and decreases by 50% of any capital losses your company incurs.
- Capital dividend payments received – The capital dividend account balance will also increase by any capital dividends paid to your corporation, from another corporation
- Life insurance proceeds – If your corporation receives proceeds from a life insurance policy, and the proceeds are greater than the cost base of the life insurance, then that difference will be added to the capital dividend account balance
- Gains on eligible capital property – 50% of any gains on eligible capital property will be added to the capital dividend account balance.
|Year||Capital gain/(loss)||Non-taxable portion (50%)||CDA Balance|
Your corporation would have to file a signed form T2054 to pay out a capital dividend
In this example, the corporation had capital gains in years 1, 2 and 4 which increased the capital dividend account balance by the non-taxable portion of the capital gain. The capital loss in year 3 reduced the capital dividend account balance, by the non-taxable portion of the capital loss. At the end of year 4, the corporation would be eligible to pay out $22,500 in tax free capital dividends to its shareholders.
How is the capital dividend balance paid to shareholders?
Your corporation would have to file a signed form T2054, Election for a Capital Dividend under subsection 83(2). Along with the signed T2054, a certified copy of the directors’ resolution declaring a capital dividend must also be submitted. A CDA schedule, showing how the balance is calculated must also be submitted along with the T2054 and directors resolution. If you are the person receiving the capital dividend payment you would not receive a T5, as you would with both eligible and ineligible dividend payments. You are not required to report receipt of the capital dividend anywhere on your personal tax return.
Note that the T2054 is due on or before the earlier of the day that the dividend is paid or becomes payable. The T2054 may be filed late, but CRA charges a non-deductible penalty for each month that the election is late.
What if I declare a CDA dividend that is more than the balance in my CDA account?
The penalty on paying excessive CDA dividends is equal to 60% of the excess dividend
Watch out! The penalty on paying excessive CDA dividends is equal to 60% of the excess dividend. For example, if your CDA balance was $100,000 and you declared a CDA dividend of $120,000 the penalty would be $12,000! ($20,000 excess * 60%). If this happens to your corporation it is possible to file an election to treat the excess portion as a taxable dividend, rather than a capital dividend. This election must be filed within 90 days after the date on the Notice of Assessment on excess dividends is issued.
It is critical to make sure that the CDA balance is correct, prior to declaring a capital dividend. A request can be submitted to CRA to verify the CDA balance. The request to CRA can only be made once every three years, so careful tracking of the CDA balance is recommended.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Taryn Yundt of KWB Chartered Accountants for providing this content.
Taryn Yundt, CGA
Taryn joined KWB in September 2011. Prior to joining KWB, Taryn worked for the Alberta Government in Tax and Revenue Administration. Taryn graduated from the Northern Alberta Institute of Technology, in 2011, with an applied degree in accounting. Taryn then went on to pursue her Certified General Accountant designation and was officially designated in September 2014.
Taryn works part-time, is married and has two young children. Outside of work Taryn enjoys spending time with her family and friends, camping, gardening, baking, movies, reading, cooking and travelling.