Capital Dividends – Tax Free Money

PRIVATE COMPANY OWNER – CAPITAL DIVIDEND PLANNING:

Many private company owners in Canada have accumlated wealth inside of their operating and/or holding companies.  Usually these amounts are invested in some type of investments that generate a return on the investment.  If the income generated includes capital gains, it may be possible to remove some of the funds inside of the company as a “tax-free capital dividend”.  In order for the divdends to be tax-free to the shareholder several conditions must be met:

1)  The dividend must be received by a Canadian resident

2)  There must be a sufficient balance in the Capital Dividend Account prior to the payment being made.

3)  An election form must be filed with the Canada Revenue Agency prior to the dividend becoming paid or payable.

4)  A certified true copy of a directors’ resolution and a calculation of the capital dividend account balance immediately before the payment must be sent in with the election form.

A few important points:

1)  The balance is tracked by the taxpayer and sometimes gets forgotten about.

2)  It may be possible with the proper timing of selling of securities with gains and losses to remove the capital dividend and defer the company paying corporate taxes on the gain on the sale.

3)  If the election form and filings are not done properly, or there is not a sufficient balance in the Capital Dividend Account a penalty tax may be payable and the dividend may not be tax-free.

There are other components that may create additions to the Capital Dividend Account such as corporate owned life insurance proceeds and the sale of Eligible Capital Property (for example sale of goodwill or customer lists) that can increase the amount available to distribute.   It is very important that the filings are done properly and sufficient balances exist in the Capital Dividend Account before the dividend is paid.  We strongly suggest you consult with your accountant prior to paying out such a dividend.

This is one of the areas that we review in our “PRIVATE COMPANY TAX CHECKUP” check it out at: http://www.karnertax.com/tax-check-up/ it might save you some tax dollars!!!

bill@karnertax.com
www.karnertax.com
T: 905-401-0023 F: 905-892-3543
B.D. Karner Professional Corporation
209 HWY. 20, Suite 1 Fonthill, Ontario, L0S 1E6