Capital dividend account (CDA)

You meet the CDA when a private corporation has sold capital property or received certain tax-free amounts, and the owners want to know what can be paid out. The Canada Revenue Agency’s folio says the account keeps track of tax-free surpluses, which may be distributed tax-free in the form of capital dividends to the corporation’s Canadian-resident shareholders.

How a capital dividend is paid

The folio says a corporation that is a private corporation, as defined in subsection 89(1), may elect, on Form T2054 by the election due date; a late election can still be filed with a late-filing penalty. If the amount elected exceeds the account, the corporation is subject to an additional tax, called Part III tax, though the folio says an election is available to avoid it. The folio lists the most common amounts in the account as the tax-free portion of capital gains in excess of the non-deductible portion of capital losses, life insurance proceeds on certain policies, and capital dividends received from other corporations. The tax guide for a sale shows where the account can come up, and a holding company may be the corporation that owns it.

What to ask

• What the balance is, and whether it has been verified with the CRA
• Whether any prior capital dividend was elected, and when
• Whether the corporation is still a private corporation