A Capital Dividend Account (CDA) is comprised of the tax free portion of capital gains which have been made from the deposition of an asset. This tax free portion is held in what is call the Capital Dividend Account and can be paid out to shareholders as tax free dividends.
Example of how a CDA works:
- Company ABC which you are a shareholder off sells one of their properties which they have held for a period longer than 12 months and realizes a capital gain of $100,000 upon it's deposition.
- 50% of these funds ($50,000) will be placed in the companies Capital Dividend Account (CDA), with the remaining 50% to be taxed at the standard corporate/capital gains tax rate.
- This $50,000 can now be distributed to the shareholders of the company as a tax free dividend.
The Capital Dividend account can also be eroded through capital losses - this is why it is important to ensure your CDA strategy includes reducing the CDA to ensure that any future capital losses don't have as much impact on your potential tax free gains.