Capital Dividend Account (CDA)

The Capital Dividend Account (CDA) is a notional account maintained by Canadian private corporations that tracks the non-taxable portion of capital gains realized by the corporation. When a corporation realizes a capital gain, 50% of that gain is taxable and included in income — the other 50% flows into the CDA.

The CDA allows a private corporation to distribute the non-taxable portion of capital gains to Canadian-resident shareholders as a tax-free capital dividend. This is a key tool in business succession planning: before selling a business, shareholders may extract CDA balances tax-free to reduce the capital that will be subject to tax on the eventual sale.

Capital dividend elections must be made in prescribed form under subsection 83(2) of the Income Tax Act before the dividend is paid. Paying a capital dividend in excess of the CDA balance triggers a substantial penalty tax.

See also: Capital Gains, LCGE, QSBC, Estate Freeze.