Capital Dividend Account (CDA) and Eligible Capital Expenditures (ECE) – Beware

“CDA payments related to ECE cannot be paid until the next taxation year.”

Dispositions of Eligible Capital Property (ECP) can result in an addition to the capital dividend account. Because subsection 14(1) refers to an excess amount included in income at the end of the taxation year, the addition to the CDA occurs at the end of the year in which the sale of the ECP took place. As a result, the CDA cannot be paid out tax-free until the first moment of the following taxation year.

If an error is made, the tax consequences can be severe. The amount received by the taxpayer will be a taxable dividend subject to full taxation. One cannot tell the CRA that the amount was not paid since the CDA form will have been mailed with a copy of the director’s resolution acknowledging that the amount was paid from the CDA. It is irrelevant whether the amount paid was loaned back.

It is crucial that all tax practitioners are aware of this and ensure that their clients do not pay capital dividends relating to ECP until the following taxation year.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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Cadesky Tax