Tax Lesson 21 YOURLOGO Start Lecture Note: This screen has no script. Static page. YOURLOGO Start Lecture

Capital Dividend Account A capital dividend is a tax-free dividend. A capital dividend can only be paid by a private corporation with a positive balance in its capital dividend account (CDA) Only private corporations have a capital dividend account and an election must be filed prior to the payment of the capital dividend. The CDA is a notional account that keeps track of tax-free items earned by the private corporation from the day of incorporation or January 1, 1972 (whichever is later) to today (i.e., the day you pay the capital dividend) The CDA consists of positive balances only (negative balances are deemed to be zero) of each of the following four items: The tax-free portion of capital gains minus the non-allowable portion of capital losses (currently ½); The tax-free portion of gains on eligible capital property. Note that an economic gain (i.e., P of D - original cost) on a disposition of eligible capital property that results in a negative CEC balance will be half taxable (as business income) and the other half adds to the private corporation’s CDA. (Starting in 2017 CEC will be taxed the same as other depreciable assets);

Capital Dividend Account (cont) Tax-free life insurance proceeds received. (Corporations can take life insurance out on their key employees, where the corporation is the beneficiary); and Capital dividends received from other private corporations Capital dividends paid by the corporation will reduce the company’s CDA balance

Example Problem Capital Dividend Account Private Co. is a CCPC with a January 31st year-end. Private Co. was incorporated in 2011 and it had the following capital transactions: In 2012 it received a capital dividend of $10,000; In 2014 it earned a capital gain of $40,000 and in 2016 it had a capital loss of $60,000 In 2015 it paid a capital dividend of $3,000 How much of a (tax-free) capital dividend can Private Co. pay today?