DEFINITION of 'Capital Dividend Account - CDA'

The capital dividend account (CDA) is a special corporate tax account which gives shareholders designated capital dividends, tax-free. This account is typically used in Canada, and is not recorded in the corporation's taxable accounting entries or financial statements.

BREAKING DOWN 'Capital Dividend Account - CDA'

A capital dividend is a type of payment a firm makes to its shareholders. The payment is taken out from paid-in capital, and not from the company’s retained earnings as is the case with regular dividends. When capital dividends are paid out to shareholders, these are not taxable because the dividends are viewed as a return of the capital that investors pay in.

When a company generates a capital gain from the sale or disposal of an asset, 50% of the gain is subject to a capital gains tax. The non-taxable portion of the total gain realized by the company is added to the capital dividend account (CDA). The capital dividend account is part of a tax provision whose goal it is to enable tax-free money received by a company to be given to its shareholders, tax free. Therefore, shareholders are not required to pay taxes on these distributions. As long as the company has this notional account, they can designate an appropriate amount of dividends as a capital dividend.

The balance in the CDA increases by 50% of any capital gains a company makes, and decreases by 50% of any capital losses incurred by the company. A business’ CDA also increases when other companies pay capital dividends to the business. A company that receives life insurance proceeds in excess of the cost basis of the life insurance, will have the excess amount added to the CDA balance. Lastly, certain distributions made by a trust to a corporation at the end of the trust’s taxation year increase the balance in a firm’s capital dividend account.

A capital dividend can only be declared if the CDA balance is positive. A company that pays dividends to shareholders in an amount that is more than what is available in the CDA will be subject to a steep tax penalty of 60% of the excess dividend. The CDA balance is not found in a business' financial statements, but may be reported in the notes to financial statements for information purposes only.

The capital dividend account is more commonly used in Canada. A shareholder who is a non-resident of Canada must pay a 25% flat withholding tax on any capital dividends received. The withholding tax rate may be reduced if the dividend is paid to a shareholder who has his/her residence in a country that has a tax treaty with Canada. For examples, a U.S. shareholder who receives a capital dividend from a Canadian corporation will be subject to a withholding tax of only 5%. In addition, non-resident investors would most likely be taxed under the tax laws of their country of residence.

RELATED TERMS
  1. Dividend

    A dividend is a distribution of a portion of a company's earnings, ...
  2. Dividend Rate

    The dividend rate is the total expected dividend payment from ...
  3. Dividend Policy

    Dividend policy structures the dividend payout a company distributes ...
  4. Forward Dividend Yield

    A forward dividend yield is an estimation of a year's dividend ...
  5. Property Dividend

    A property dividend is an alternative to cash or stock dividends. ...
  6. Special Dividend

    A special dividend is a non-recurring distribution of company ...
Related Articles
  1. Investing

    Understanding Taxes on Mutual Funds Dividends

    Learn about the basics of mutual fund dividend taxation, including how and why mutual funds pay dividends and when different tax rates apply to dividend income.
  2. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  3. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  4. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  5. Financial Advisor

    How mutual funds pay dividends: An overview

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  6. Investing

    Dividends Still Look Good After All These Years

    Find out how this "first love" still holds its bloom as it ages.
  7. Investing

    The Top 5 Dividend Paying Oil Stocks for 2016

    Discover the top five dividend-paying oil companies for 2016 and what factors contribute to their ability to continue dividend payments.
  8. Financial Advisor

    4 Reasons a Company Might Suspend Its Dividend

    Learn about the four most common reasons a company may choose to suspends its dividends, including financial trouble, funding growth and unexpected expenses.
RELATED FAQS
  1. Can dividends be paid out monthly?

    Find out how stocks can pay dividends monthly and learn about the types of industries or companies that will most likely ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center