Let’s talk about the Capital Dividend Account (CDA) and why it’s such a big deal for Canadian business owners.
What’s a Capital Dividend Account (CDA)?
A CDA is a special account that keeps track of certain tax-free surpluses the company builds up over time. These surpluses can be paid out to shareholders as tax-free dividends.
In Canada, whether you or your corporation earns capital gain from the sale of an asset, up to two-thirds of the gain is added to your income for taxes. Specifically for corporations, the CDA accumulates the remaining untaxed portion of capital gains.
How Does the CDA Work?
When there’s a positive balance in the CDA, the corporation can declare and pay out a capital dividend to shareholders. That dividend is completely tax-free for the shareholders.
It’s all about the principle of integration in Canada’s tax system. This principle ensures that whether you earn income as an individual or through a corporation, you end up paying roughly the same amount of tax.
Extracting funds from a corporation would generally be subject to taxation to the shareholder either as a dividend or salary. The CDA steps in to prevent the double taxation by allowing special dividends to be paid out tax free. This recognizes that if the same income were to be earned as an individual, an equal portion would be earned free of tax.
Need Help with Your CDA?
The CDA can be a powerful tool in the Canadian tax landscape, and payment of capital dividends follow very stringent CRA rules and filings. If you’re curious about how a CDA can benefit your business, RHN Chartered Professional Accountants are here to help.
Our team of experts can walk you through the ins and outs of tax planning, ensuring you make the most of every opportunity. Contact us today to get started.
This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation. Please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.
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