What Is a Capital Dividend Account (CDA)?

The capital dividend account (CDA) is a special corporate tax account that gives shareholders designated capital dividends, tax-free. This account is typically used in Canada and is not recorded in the corporation's taxable accounting entries or financial statements.

Understanding Capital Dividend Accounts (CDA)

A capital dividend is a type of payment a firm makes to its shareholders. The payment is taken out from 澳洲幸运5开奖号码历史查询:paid-in capital, and not from the company’s 澳洲幸运5开奖号码历史查询:retained earnings as is the case with regular dividends. When capital divide⛎nds are paid out to shareholders, these are not taxable because the dividend🧔s are viewed as a return of the capital that investors pay in.

When a company generates a 澳洲幸运5开奖号码历史查询:capital gain from the sale or disposal of an asset, 50% of the gain is subject to a 澳洲幸运5开奖号码历史查询:capital gains tax. The non-taxable portion of the total gain realized by the company is added to the capital dividend account (CDA). The capital dividend account is part of a tax provision whose goal it is to enable tax-free money received by a company to♚ be given to its shareholders, tax-free. Therefore, shareholders are not required to pay taxes on these distributions. As long as t🦂he company has this notional account, they can designate an appropriate amount of dividends as a capital dividend.

The balance in the CDA increases by 50% of any capital gains a company makes and decreases by 50% of any 澳洲幸运5开奖号码历史查询:capital losses incurred by the company. A business’ CDA also increases when other companies pay capital dividends to the business. A company that receives 澳洲幸运5开奖号码历史查询:life insurance proceeds in excess of the 澳洲幸运5开奖号码历史查询:cost basis of the life insurance, will have the excess amount added to the CDA balance. Lastly, certain distributions made by a trust to a corporation at the end of the trust’s taxati𒁃on year increase the balance in a firm’s capital dividend account.

A capital dividend can only be declared if the CDA balance is positive. A company that pays dividends to shareholders in an amount that is more than what is available in the CDA will be subject to a steep tax penalty of 60% of the excess dividend. The CDA balance is not found in a business' financial statements but may be reported in the 澳洲幸运5开奖号码历史查询:notes to financial statements for information purposes only.

The capital dividend account is more commonly used in Canada. A shareholder who is a 澳洲幸运5开奖号码历史查询:non-resident of Canada must pay a 25% flat 澳洲幸运5开奖号码历史查询:withholding tax on any capital dividends received. The withholding tax rate may be reduced if the dividend is paid to a shareholder who has their residence in a country that has a 澳洲幸运5开奖号码历史查询:tax treaty with Canada. For example, a U.S. shareholder who receives a capital dividend from a Canadian corporation will be subject to a withholding tax of only 5% (25% minus 20% U.S. tax owed on 澳洲幸运5开奖号码历史查询:qualified dividends). In addition, non-resident investors would most likely be taxed under🦄 the tax laws of their country of residence.