Capital dividend account

Capital dividend account
See also
Debt service coverage Franked Dividend Interest in possession trust Modified adjusted gross income In-kind distribution Rate base Unearned Premium Expanded accounting equation Contributed Surplus

Capital dividend account- The capital dividend account (CDA) is available only to certain private corporations resident in Canada. CDA is not an actual bank account or financial institution. It is a special, national, tax account of an corporation that fulfills the conditions. Certain receipts are credited to the capital dividend account, and when the corporation declares a dividend, or there is a deemed dividend on the redemption of shares, to the extent of the amount recorded in the capital dividend account, the corporation may elect that the dividend be a capital dividend. Capital dividend will be received tax- free by the recipient shareholder .

Conditions

The terms determining whether a corporation qualifies for a CDA:

• the corporation must be a Canadian, and private corporation throughout at least one taxation year;
• the corporation must obtain certain tax-free income, such as the non-taxable portion of capital gains accured while the corporation was a CCPC (Canadian Controlled Private Corporation), and realized by the corporation (net of the non-allowable portion of any capital losses), capital dividends received by the corporation, tax free amounts received by the corporation on the sale of “eligible capital property”. The mortality gain on life insurance proceeds received by the corporation as a beneficiary.

Meaning

As Guglielmo Maisto writes: "The most relevant components of Capital Dividend Account are:

• the tax free portion (currently 50%) of any capital gains net of capital losses earned by the corporation;
• net life insurance proceeds recieved by the corporation
• capital dividends are recieved by the corporation from other private corporations.

While capital dividends are a useful tax advantage, they cannot be paid by public corporations, and the classification is of little import to foreign shareholders given that Canadian withholding tax applies to both, taxable dividends, and capital dividends."

Account credit

The CDA credit is the aggregated of every certain receipts, minus capital dividends paid by the corporation.

Examples of Capital dividend account

1. *A company receives a large sum of money from a lawsuit settlement. This money can be credited to the company's capital dividend account and used to pay capital dividends to shareholders tax free.
2. *A corporation sells some of its shares for a gain. The proceeds of the sale are credited to the capital dividend account and can be used to pay capital dividends to shareholders tax free.
3. *A company has a large retained earnings balance that it wants to distribute to its shareholders. By crediting the amount to its capital dividend account, it can distribute the capital dividends to its shareholders tax free.

Advantages of Capital dividend account

The capital dividend account (CDA) offers numerous advantages to both private corporations and shareholders. These advantages include:

• A corporation may use the CDA to reduce the overall tax burden on its shareholders. This is done by allowing the corporation to declare capital dividends, which are received tax-free by the shareholders.
• The CDA is also a beneficial tool for corporations that wish to avoid double taxation. This is because the CDA allows the corporation to distribute capital dividends, which are not included in the shareholder's taxable income.
• The CDA also provides a way for corporations to pass along income to shareholders without having to worry about the consequences of double taxation. This is done by allowing the corporation to declare capital dividends, which are received tax-free by the shareholders.
• Furthermore, the CDA provides a method for corporations to return income to shareholders without triggering any tax liability for the corporation. This is because the CDA allows the corporation to declare capital dividends, which are not taxable for the corporation.

Limitations of Capital dividend account

The Capital Dividend Account (CDA) can be used by certain private corporations resident in Canada. However, there are certain limitations to its use:

• The CDA cannot be used as an actual bank account or financial institution.
• The corporation must fulfill certain conditions in order to be eligible for the CDA.
• The CDA can only be credited with certain specific receipts.
• A corporation must declare a dividend or deemed dividend in order to access the account.
• The dividend must be declared as a capital dividend in order to be received tax-free by the recipient shareholder.

Other approaches related to Capital dividend account

Introduction: There are several approaches that companies use to make use of the capital dividend account.

• Companies can use the CDA to transfer corporate funds to shareholders on a tax-free basis. This can be done through the declaration of a capital dividend, which is paid out of the CDA.
• Companies can use the CDA to reinvest retained earnings. This allows the company to increase its capital base and have access to additional funds for growth or operations.
• Companies can use the CDA to reduce the taxation of shareholders when dividends are paid out. For example, if a company pays a dividend out of its CDA, the dividend will be taxed at a lower rate than if it was paid out of the company’s profits.
• Companies can also use the CDA to buy back their own shares, which can help to boost the value of the shares.

Summary: The capital dividend account is a tax-advantaged account that can be used by companies to transfer corporate funds to shareholders, reinvest retained earnings, reduce the taxation of shareholders when dividends are paid out, and to buy back their own shares.

References

• Bollefer S.F., Bernstein J., (2009) Shareholders' Agreements: A Tax and Legal Guide CCH Canadian Limited, USA
• CCH Australia, Limited, (2011) Australian Master Tax Guide 2011 McPherson's Printing Group, Australia
• CCH Australia Staff, (2012) Australian Master Tax Guide 2012 McPherson's Printing Group, Australia
• CCH Canadian Limited, (2010) Canadian Income Tax Act: With Income Tax Regulations CCH Canadian Limited, USA
• Dowling R D., (2013) Are You Taking Ownership of Your Career?: A Guide for the Canadian FriesenPress, Canada
• Maisto G., International Bureau of Fiscal Documentation, (2012) Taxation of Intercompany Dividends Under Tax Treaties and EU Law EC and International Tax Law Series, Vol. 8

Author: Michał Skrabski