What is a Capital Dividend?
If you hold investments in your corporation, sooner or later you will hear the VR team talk to you about declaring a capital dividend, but what is it?
As most people know, when a capital gain is incurred personally only 50% of the gain is taxed. However, when a corporation incurs a capital gain 50% is taxed and the 50% which is not taxed accumulates in the Capital Dividend Account (“CDA”).
The CDA also includes capital dividends received from other companies, insurance proceeds in excess of the adjusted cost base and gifts of publicly traded securities to a qualified charity. However, the CDA is reduced by half of any capital losses which are incurred by the corporation.
When you have a positive balance in the CDA, a tax-free capital dividend can be paid to the shareholder. Yes, you read that correctly TAX-FREE. You will need to file election forms with the CRA first though.
The balance in the CDA is determined at a point in time, and if a capital dividend is declared and the amount in the CDA is less than the dividend, a penalty of 60% will be applied to the excess amount, ouch!
As the account balance is reduced by any capital losses incurred, it is crucial to ensure that all activity is included in the calculations prior to the election date.
Additionally, capital dividends can be subject to a late filing penalty if the election is filed with CRA after it’s due date, which can vary in size depending on how large the capital dividend is and how late it was filed.
Timing is everything! And election forms are a must! We’ve got you covered though. We are all about tax-free! The VR team would be happy to clarify any questions!