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. Stock Dividend

    A stock dividend, also known as a scrip dividend, is a dividend ...
  2. Gross Dividends

    Gross dividends are the sum total of all dividends received, ...
  3. Dividend Exclusion

    Dividend exclusion is a rule that allows corporations to subtract ...
  4. Dividend Aristocrat

    A dividend aristocrat is a company that has continuously increased ...
  5. Accrued Dividend

    An accrued dividend is a liability that accounts for dividends ...
  6. Liquidating Dividend

    A liquidating dividend is a type of payment that a corporation ...
Related Articles
  1. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  2. 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.
  3. 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.
  4. 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.
  5. Investing

    3 Dividend Trends in the S&P 500 Index (TSN, LUV)

    Analyzing recent financial performance of companies demonstrating an inclination to issue consistent dividends to shareholders on a quarterly basis.
  6. Investing

    Introduction To Dividends

    Investing in dividend-paying stocks can be an effective method of building long-term wealth.
  7. Investing

    Dividend Growth Likely to Slow in 2017

    Investors who saw dividend increases in the past five years are likely to see them slow this year.
RELATED FAQS
  1. If I reinvest my dividends, are they still taxable?

    If you reinvest your dividends, you still pay taxes as though you received the cash. Stock dividends are generally not taxable ... Read Answer >>
  2. Is there a difference between capital gains and dividend income?

    Selling something for a profit leads to capital gains. A payment made by a corporations to stockholders is a dividend. Both ... Read Answer >>
Trading Center