As we reach the mid-point of the 2017 calendar year, it has been a good financial year for many British Columbian investors. Real estate gains continue and, for equity investors, the stock market has been on a tear since the fall of 2016.
Vancouver Corporate Tax Planning
With the conclusion of the personal tax-filing season, summer and fall is the time for corporate tax planning. The one tax planning item that should be looked at this year, due to such favorable macro-financial conditions, is the capital dividend account (CDA). CDA is a notional account used to track the non-taxable portion of capital gains and proceeds of life insurance policies upon death. These items are accumulated in the CDA account year to year and are reduced by distributions paid out of the account to shareholder(s).
Canadian Dividend Account
Generally, distributions from a Canadian corporation to a shareholder are taxable. However, distributions to shareholders out of the CDA are non-taxable, as long as the distribution does not exceed the CDA balance.
The tax treatment of the CDA balance distribution is not unreasonable. When an individual buys and sells stocks or real estate, half of the gains are tax free. So when a Canadian corporation incurs capital gains from its capital investments, half the gain is also tax free. It is this tax-free half that the Income Tax Act (ITA) allows as tax-free distribution back to the shareholder. Similarly, life insurance benefit proceeds are also tax free when received by an individual, and the ITA is granting the same treatment to a corporation that owns the life insurance policy of a shareholder.
When a balance exists in the CDA, plans should be taken to pay out the CDA as soon as possible, because capital losses erode the CDA balance as the losses are incurred. Hence, with a buoyant real estate market and equity market, British Columbians should include the impact on the CDA balance of selling assets at a gain, because half of the gains can be taken out tax free.
An important reminder is that only private corporations have a CDA balance. Also, distributions to non-residents are subject to Canadian withholding taxes, hence not a tax-efficient distribution.
A distribution out of the CDA does not happened automatically. An election must be made in respect to the dividend when the dividend is paid or becomes payable. Late-filed election is acceptable, and the penalty is not very punitive but increases with time.
The main tax planning points are:
- CDA is only for private Canadian corporations
- Should be paid out to Canadian residents to maximize the tax benefit
- Should be taken out as soon as available and before disposing assets at a loss
- Election required