The Capital Dividend Account is a notional CRA ledger that tracks amounts a private corporation can distribute to Canadian shareholders completely tax-free as a capital dividend.

When a corporation realizes a capital gain, only half is taxable, the taxable capital gain. The other half flows into the CDA. Certain life insurance proceeds received by the corporation do the same. Those CDA credits can be paid out to Canadian resident shareholders as a capital dividend with zero personal tax owing on receipt.

Most business owners have never heard of the CDA and leave meaningful tax-free distributions sitting inside the corporation indefinitely. The opposite error is equally damaging: paying out more than the CDA balance as a capital dividend triggers Part III penalty tax, a severe and irreversible consequence. Both errors are avoidable with annual tracking and a declaration confirmed against the current balance before any capital dividend is declared.

The CDA is one of the most valuable and most overlooked tax-free distribution tools available to incorporated Canadian business owners. See how Wefinx approaches tax planning.

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