CDA 101: Capital Dividend Account

For Your Client

Your CPA has discussed the Capital Dividend Account (CDA) with you. This article explains how investment portfolio structure affects CDA credits over time. For tax advice and CDA calculations specific to your corporation, consult your CPA.

What This Means for Your Corporate Investments

When your CPA discusses the Capital Dividend Account, they're explaining how you can extract corporate wealth tax-free. This article focuses on the investment structure side of that conversation.

The Basic Concept:

The CDA is a notional account that tracks tax-free amounts your corporation can pay as capital dividends to shareholders. Capital dividends are received tax-free at the personal level, making them an efficient way to extract corporate wealth.

The Investment Connection:

How you structure your corporate investment portfolio determines:

What types of income you generate (capital gains, interest, dividends)
How much CDA credit you build over time
How efficiently you can extract corporate wealth

How the CDA Works (Visual Overview)

What Adds to CDA

50% of capital gains
Life insurance proceeds (net of cost basis)
Capital dividends received

What Reduces CDA

Capital dividends paid
50% of capital losses

Example:

If your corporation realizes a $400,000 capital gain:

50% of the gain = $200,000
This $200,000 is added to your CDA
You can pay this as a tax-free capital dividend to shareholders

Note: Your CPA can calculate your exact CDA balance and help you plan capital dividend payments.

How Investment Structure Affects CDA

Your investment portfolio structure determines what types of income you generate, which affects how much CDA credit you build:

Capital Gains-Focused Portfolio

Generates: Capital gains when investments are sold
CDA Impact: 50% of capital gains added to CDA
Example: Growth-oriented investments, corporate-class funds

Interest-Heavy Portfolio

Generates: Interest income
CDA Impact: No CDA credit (interest doesn't add to CDA)
Example: GICs, bonds, savings accounts

Dividend-Heavy Portfolio

Generates: Dividend income
CDA Impact: No CDA credit (dividends don't add to CDA)
Example: Dividend-paying stocks, dividend ETFs

Life Insurance

Generates: Death benefit proceeds
CDA Impact: Full amount (net of cost basis) added to CDA
Example: Corporate-owned permanent life insurance

Important: This is about structure, not avoiding investing. The goal is to understand how portfolio structure affects CDA credits over time.

One Example: Structure Matters

Note: This example is illustrative only. Your CPA can provide calculations specific to your corporation.

Two portfolios, same $1,000,000 value:

Portfolio A: Interest-focused

Generates $60,000 interest income per year
CDA credit: $0 (interest doesn't add to CDA)
After 10 years: $0 CDA credit

Portfolio B: Capital gains-focused

Generates $60,000 capital gains per year
CDA credit: $30,000 per year (50% of gains)
After 10 years: $300,000 CDA credit available for tax-free distribution

The difference: Same returns, different CDA building capacity because of structure.

Life Insurance and CDA

Corporate-owned life insurance is particularly effective for building CDA credits:

How it works:

Premiums are paid with after-tax corporate dollars
Cash value grows tax-exempt inside the policy
Death benefit is received tax-free by the corporation
Death benefit (net of adjusted cost basis) is credited to CDA
CDA balance can be distributed tax-free to shareholders

The advantage: Life insurance provides both tax-exempt growth during life and tax-free extraction through CDA at death.

Discuss with your CPA: They can help you understand how life insurance fits into your CDA strategy and coordinate with your tax strategy.

What This Means for Long-Term Planning

Over decades, building CDA credits helps you:

Extract corporate wealth tax-free to shareholders
Coordinate investment strategy with tax strategy
Optimize total wealth across corporate and personal accounts
Plan for estate transfer with tax-free distribution mechanisms

This is not about avoiding corporate investing. It's about understanding how structure affects CDA credits over time.

Next Steps: Coordinate with Your Team

With Your CPA:

Calculate your current CDA balance
Understand what transactions add to or reduce CDA
Plan capital dividend payments strategically
Coordinate CDA strategy with your tax strategy

With Your Investment Advisor:

Review your current portfolio structure
Understand what income types you're generating
Explore options for building CDA credits while still growing wealth

The goal: Coordinate tax strategy (CPA) with investment structure (Investment Advisor) for long-term results.

Important Notes

Tax Advice:

This article explains investment structure concepts, not tax advice
For tax calculations and CDA advice specific to your corporation, consult your CPA
Tax rules are complex and subject to change

Investment Considerations:

Past performance does not guarantee future results
Investment structure is one factor among many
Work with your investment advisor to understand options

Professional Coordination:

This article encourages coordination between your CPA and investment advisor
Tax strategy and investment structure work together
Your CPA remains your primary advisor for tax matters

Full Disclosure

This content is for information and education only. It explains general concepts about how investment structure affects the Capital Dividend Account, but it is not personalized tax, legal, or investment advice.

Tax Considerations:

Tax rules are complex and subject to change
CDA calculations depend on your specific corporate structure, province, and circumstances
Always consult with a qualified CPA before making any CDA-related decisions
The penalty for overpaying capital dividends is severe (60% of excess); professional guidance is essential
This article does not replace professional tax advice