A Capital Dividend Account (CDA) is a cumulative account that shows various tax-free surpluses accumulated by a private corporation.
The surpluses in a CDA are usually distributed to the corporation’s Canadian-resident shareholders in the form of tax-free capital dividends.
Private corporations that pay capital dividends are required to file an election in respect of the dividend when it is paid or when it becomes payable.
This is referred to as a capital dividend election.
It is important to note that if your corporation pays a capital dividend that is more than the balance in a capital dividend account, this can result in additional tax consequences.
Capital Dividend Account Eligibility
Only a private corporation can elect to pay capital dividends to its Canadian-resident shareholders.
If your corporation was previously a private corporation with a capital dividend account balance, but later became a public corporation, you will not be eligible to pay a capital dividend.
The CDA balance usually comprises the following:
- The non-taxable portion of capital gains: This is the tax-free portion of capital gains that your corporation realizes after taking into account the non-deductible portion of your corporation’s capital losses.
- Life insurance proceeds on certain policies: If your corporation is a beneficiary under an insurance policy, this will include the net proceeds of the life insurance policy that your corporation receives.
- Capital dividends received by the corporation: These are capital dividends that your corporation has received from other private corporations.
- Eligible capital property: This includes the non-taxable part of gains received from disposing of eligible capital property.
- Capital dividends from a trust: This refers to the dividends received by a trust for which an election was made, and that the trust distributed to the corporation.
Issuing a Capital Dividend
To issue a capital dividend, a corporation must first make an election to pay the amount as capital dividends.
A private corporation can make this election by filling and submitting Form T2054, Election for a Capital Dividend.
Eligible corporations should make the capital dividend election by the applicable due date.
However, corporations can make a late capital dividend election along with a late-filing payment penalty.
The due date for electing to pay a capital dividend is the earlier of:
- the day on which the dividend becomes payable or,
- the day that the whole or partial dividend is paid.
When making an election for a capital dividend, your corporation will need to submit certain documents such as Schedule 89 (Form T2SCH89, Request for Capital Dividend Account Balance Verification) that show the calculation of your CDA balance just before the election.
If your corporation elects to pay a capital dividend that exceeds the amount in your capital dividend account, this will result in an excessive election.
Generally, the only eligible capital dividend will be the amount that is equal to the CDA balance.
Additionally, your corporation will be subject to the Part III tax which is 60% of any excess capital dividend plus interest until the date the dividend is paid.
Your corporation can elect to avoid the Part III tax.
When you make this election, the excess portion of the capital dividend will be treated as an ordinary taxable dividend in the hands of the recipient shareholders.
Generally, your corporation can make this election only if all the shareholders entitled to any portion of the original dividend agree to this.
Receiving a Capital Dividend
A capital dividend is made tax-free to shareholders who are considered to be Canadian residents.
The dividend is paid tax-free by private corporations and this means that if you have received a capital dividend as a taxpayer, you do not need to include this as income in your tax return.
However, if you receive a dividend from a private corporation that classifies as an excess capital dividend, then you will be responsible for any resulting additional tax and interest.
This tax is referred to as the Part III tax, which is 60% of any excess capital dividend.
The excess portion of the capital dividend that you receive will be treated as an ordinary taxable dividend.
Frequently Asked Questions
- How do I check my CDA balance with CRA?
As a private corporation, you can verify your capital dividend account balance by filling out and submitting form T2SCH89, Request for Capital Dividend Account Balance Verification. You can submit this form alone or attach it to Form T2054, Election for a Capital Dividend when you elect to pay out a capital dividend from your CDA.
- Does a capital dividend have to be paid in cash?
No, a capital dividend can be paid in different forms such as cash, stock, in-kind, or as a deemed dividend.