Capital Dividend Account (CDA)
The capital dividend account, or CDA, is a notional tax account created for tracking specific amounts of corporate funds that can be paid tax free to shareholders of private companies by means of a "capital dividend". It is not an account that is recorded on the accounting records or on the financial statements of the corporation. Examples of these tax-free receipts, or capital dividends, include:
- the tax-free portion of capital gains realized by a private corporation,
- capital dividends received by a private corporation, and
- proceeds received by a private corporation from a life insurance , in which the corporation is the .
With respect to a capital dividend credit arising from a life insurance death benefit, the company must be the beneficiary of the policy and not just the owner of the policy. The amount that will be credited to the CDA of the company is equal to the death benefit amount minus the adjusted cost base of the policy at the time of death. Typically, a policy held to life expectancy will result in nearly all or a very high percentage of the death benefit credited to the CDA.
|$1 million whole life policy with basic premiums for 20 years, for a 45 year-old male.|
|Year||Age||Death Benefit ($)||CDA Credit ($)|
The above is an example of the CDA credit and the death benefit for a male, age 45, with a $1,000,000 whole life policy.
In its simplest form, the capital dividend account can be used to distribute life insurance proceeds to Canadian resident beneficiaries on a substantially tax-free basis. With more creative planning, life insurance proceeds can actually be used as part of a share redemption strategy to significantly reduce the capital gains tax liability that will arise as a result of theof capital property immediately before death. These redemption strategies represent some of the most powerful benefits associated with corporate- owned life insurance.