Question

• Write, in your own words, an easy to understand article (<1 page) on the “Capital Dividend Account” (CDA). Include:
  • What it is.
  • How it works.
    • What generates a CDA balance?
    • How can CDA be used?
    • Things to watch out for.

Answer 1

Solution. As the name suggest capital dividend is the return of amount on investment of investors of the organization tax free. Capital Dividend Account is a tax provision programme employed for the dividend payment of organization's investors from paid-in-capital of the organization.

An organization working under economic market earns a capital gain, half of such generated amount goes under tax and the non-taxable amount is realized under the CDA which serves as an notional account of the organization and also covers other forms of gains from other companies and reported as notes to financial statements of an organization during the accounting period as it does not form part of retained earnings and so is tax free.

CDA balance is generated or computed taking organization's total assets less total liabilities, and is paid out of shareholder's equity balance.

To employ CDA, organization need to watch out to be canadian controlled private corporation, to encompass the activities of tax free income realized to allow it to render tax free passing of the return to the investors of the organization. It can be employed to be used in buying or selling of agreement and insuring key person coverage in area under life insurance, etcetera.