Capital Dividend Account (CDA)

The capital dividend account, or CDA, is a notional tax account created for tracking specific amounts received by a corporation that would otherwise have been tax-free if received directly by the shareholder.  Amounts in a private corporation’s CDA can be paid as tax-free capital dividends to its shareholders. Examples of tax-free receipts that can be credited to the CDA of a private corporation include:

  • the amount by which the non-taxable portion of  capital gains exceeds the non-deductible portion of capital realized by a private corporation,
  • capital dividends received from other corporations, and
  • proceeds received  from a life insurance death benefit, under which the corporation is the beneficiary.

With respect to a CDA  credit arising from a life insurance death benefit, the amount of the credit is equal to the death benefit amount minus the adjusted cost basis (ACB) 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 being credited to the CDA. However, tax changes applicable to policies issues after 2016 may result in a higher ACB for a longer period of time, which will reduce the amount credited to the CDA.

Below is an example of the death benefit and CDA credit for a male, age 45, with a $1,000,000 whole life policy. 

$1 million whole life policy with basic premiums for 20 years, for a 45 year-old male.
Year Age Death Benefit ($) CDA Credit ($)
5 50 1,118,371 966,113
10 55 1,340,280 1,045,441
20 65 1,824,129 1,475,444
25 70 1,985,889 1,739,720
30 75 2,152,115 2,059,736
40 85 2,636,373 2,636,373

In summary, the capital dividend account can be used by a private corporation to distribute life insurance proceeds to Canadian resident shareholders, substantially on a tax-free basis. With more creative planning, life insurance proceeds can be used as part of a share redemption strategy to significantly reduce the capital gains tax liability that will arise as a result of the deemed disposition of shares in a private corporation immediately before death. These redemption strategies represent some of the most powerful estate planning benefits associated with corporate-owned life insurance.