What Is a Capital Dividend Account (CDA)?

The capital dividend account (CDA) is a special corporate tax account that offers investors designated capital dividends, tax-free. This account is usually utilized in Canada and is not tape-recorded in the corporation’s taxable accounting entries or financial declarations.

Secret Takeaways

  • The capital dividend account (CDA) is a special business tax account that offers investors designated capital dividends, tax-free.
  • When a business creates a capital gain from the sale or disposal of a possession, 50% of the gain is subject to a capital gains tax. The non-taxable portion of the overall gain realized by the business is then added to the capital dividend account (CDA), which is then distributed to investors.
  • The balance in the CDA boosts by 50% of any capital gets a company makes and reduces by 50% of any capital losses sustained by the business.
  • Capital dividend accounts are more typically used in Canada.

Understanding Capital Dividend Accounts (CDA)

A capital dividend is a kind of payment a company makes to its investors. The payment is secured from paid-in capital, and not from the business’s maintained incomes as is the case with regular dividends. When capital dividends are paid to investors, these are not taxable because the dividends are deemed a return of the capital that investors pay in.

When a business produces a capital gain from the sale or disposal of a possession, 50% of the gain goes through a capital gains tax. The non-taxable part of the overall gain understood by the company is contributed to the capital dividend account (CDA). The capital dividend account belongs to a tax arrangement whose objective it is to enable tax-free money gotten by a company to be offered to its shareholders, tax-free. Therefore, shareholders are not needed to pay taxes on these distributions. As long as the business has this notional account, they can designate a suitable amount of dividends as a capital dividend.

The balance in the CDA increases by 50% of any capital gains a business makes and decreases by 50% of any capital losses sustained by the business. A service’ CDA also increases when other companies pay capital dividends to the business. A company that receives life insurance continues in excess of the 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 tax year increase the balance in a firm’s capital dividend account.

A capital dividend can just be stated if the CDA balance is favorable. A company that pays dividends to shareholders in an amount that is more than what is available in the CDA will go through a high tax charge of 60% of the excess dividend. The CDA balance is not discovered in a company’ financial statements but may be reported in the notes to financial declarations for information purposes only.

The capital dividend account is more typically used in Canada. An investor who is a non-resident of Canada needs to pay a 25% flat withholding tax on any capital dividends got. The withholding tax rate may be lowered if the dividend is paid to an investor who has their house in a nation that has a tax treaty with Canada. For instance, a U.S. shareholder who receives a capital dividend from a Canadian corporation will be subject to a withholding tax of just 5% (25% minus 20% U.S. tax owed on qualified dividends). In addition, non-resident investors would most likely be taxed under the tax laws of their nation of home.