The Definition Of CDA Capital Dividend Account:
The CDA capital dividend account is a unique corporate tax account that gives shareholders designated capital dividends, tax-free.
How Do They Affect CDA Business?
A capital dividend is a type of payment a firm makes to its shareholders. The amount is taken out from paid-in capital and not from the CDA 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 seen as a return of the capital that investors pay in.
What About CDA Capital Gain?
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-exempt. 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 number 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 CDA 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.