By Dominique Labelle, LL.M. Fiscal authorities.
Are you a shareholder of a private company wondering how you can get money out of your corporation without receiving a hefty tax bill at the end of the year? We have a question for you: do you have a Capital Dividend Account (CDA) balance?
What is a CDC?
The CDA is a notional account that allows a private corporation to accumulate tax-free funds and distribute a tax-free dividend to its Canadian resident shareholders, equivalent in whole or in part to its CDA balance.
The main components of the CDC are as follows:
- The non-taxable portion of the capital gain in excess of the non-deductible portion of capital losses;
- Insurance proceeds less the company’s adjusted cost basis of the policy; and
- Capital dividends received from another company.
The DCC balance must be reduced by all capital dividends paid by the company to its shareholders.
For example, if OPCO, a corporation incorporated in 2018, has only realized a capital gain of $100,000 since its incorporation, $50,000 will be added to its CDA balance so that, if the corporation has no capital losses, it can pay $50,000 tax-free to its shareholder. Following payment of the $50,000 dividend, the company will have no remaining DCC balance.
Is the CDC calculation to be taken seriously?
The CDA calculation is particularly important, since a company that pays a capital dividend in excess of its CDA balance is exposed to significant taxes. Accordingly, the company must calculate its CDA balance up to the date of payment of the tax-free dividend and ensure that it does not exceed the balance. To this end, it would be advantageous to pay out the DCC balance before realizing a capital loss, so as not to lose the balance accumulated prior to the loss.
In addition, since the CDA is a cumulative account, the balance for each year since incorporation must be determined based on the applicable law for that year.
How do you pay a capital dividend?
To pay a capital dividend, the company must make a tax election using the prescribed forms. These forms must be filed with the tax authorities no later than the day the dividend becomes payable or the day a portion of the dividend is paid.
It is important that the form is submitted on time, otherwise penalties for late submission will apply.
Conclusion
At Amyot Gélinas, we can answer your questions and help you calculate your CDA balance, protect your balance from potential losses, file forms with tax authorities and even determine whether the disposition of an asset will generate a CDA balance. Don’t hesitate to call on our specialists.
