What is a capital dividend? | ScriptaLegal
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Frequently asked questions > Company > Business Corporation > What is a capital dividend?

What is a capital dividend?

Taxation of business corporations is based on the principle of "integration", that is to say, the profit realized by a business corporation and distributed to a shareholder must be subject to the same taxation as if it had been realized directly by the shareholder.

Consequently, amounts that would be tax-free if they had been received directly by a shareholder must not be taxed if received by the business corporation and then paid to the shareholder. The capital dividend account or the "CDA" is used to keep track of these amounts in order to pay them to the shareholders in the form of a tax-free dividend, which makes it very attractive for the latter.

It will then be appropriate for the business corporation to exercise an "election of dividend on its capital dividend account". Capital dividends are generally payable at the time of the declaration of such dividends.

To receive a tax-free dividend, the shareholder must, however, be a Canadian resident, failing which he will be subject to a 25% tax on dividends paid out of a capital dividend account.

It is always appropriate to consult a taxation expert or accountant regarding the impact of such declaration of dividends for a shareholder and the business corporation.

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