The Capital Dividend Account, Explained

The capital dividend account is not a bank account. There is no money in it. It is a running tally, kept for tax purposes, of amounts a private corporation is allowed to pay to its shareholders tax-free.

If your corporation invests, it is worth understanding, because it is a way for money to reach you from the corporation without personal tax. This article is educational. Your accountant confirms your corporation's figures.

Why the account exists

The capital gains inclusion rate is 50%. Half of a gain is taxable. The other half is not.

When a corporation realizes a gain, it pays tax on the taxable half. The non-taxable half is added to the capital dividend account, or CDA. The account is how that half keeps its tax-free character on the way out to you.

A proposed increase in the inclusion rate to two-thirds was cancelled in March 2025 and never took effect.

What adds to it, and what does not

A worked example, in dollars

A corporation's portfolio realizes a $100,000 capital gain. Assume the account started at zero and there are no capital losses.

The taxable half does not disappear. The corporation pays tax on it, and that $50,000 counts as investment income in the year the gain is realized. On its own, it sits at the $50,000 passive income line, not over it. Any other investment income that year would take the corporation past the line.

This is an illustration, not your corporation's figures. Your accountant confirms the balance.

How a capital dividend is paid

1. The balance is confirmed. Your accountant calculates the account and confirms what is available. Get the balance confirmed before paying.
2. The election is filed. A capital dividend requires an election, which your accountant prepares and files.
3. The dividend is paid. A capital dividend paid from the balance is received tax-free by Canadian-resident shareholders.

The order matters. Errors with this account can be costly and difficult to unwind. A capital loss realized later can also reduce the balance, so timing is worth a conversation with your accountant whenever a balance is available.

The tax-free treatment described here is for Canadian-resident shareholders. If a shareholder lives outside Canada, ask your accountant before anything is paid.

Where it fits in a corporate portfolio

Interest adds nothing to the account. Realized capital gains do. That is one reason the kind of return matters inside a corporation.

A low-distribution portfolio is built to pay out less along the way. Growth stays in the portfolio until a gain is realized. When it is, half is taxable and the other half is added to the capital dividend account. It does not remove tax, and the taxable half still counts toward the $50,000 passive income line in the year it is realized. See The Passive Income Rule for Canadian Corporations and How to Invest Retained Earnings in Your Corporation.

If you invest through a holding company, the holding company has its own account. See Investing Through a Holding Company in Canada.

What your accountant does, and what we do

Your accountant keeps the capital dividend account. They calculate the balance, confirm it, prepare and file the election, and advise on when a capital dividend fits with the rest of how you are paid. A capital dividend should not be paid on an estimate.

Our part is the investment account that produces the gains. We build corporate portfolios to be low-distribution, and the timing of gains is part of the plan. With your permission, we coordinate directly with your accountant. Nothing is ever paid between us and your accountant, in either direction.