Do you, as a business owner, know how to get money from your corporation tax-free through financial planning?
As a Financial Planner, it is essential to highlight the significance of identifying tax-saving opportunities within a client’s financial plan. The Capital Dividend Account (CDA) emerges as a unique avenue for tax-free income transfer from a corporation to an individual, offering business clients an extra tool in their belt. A CDA is a notional account that keeps track of various tax-free surpluses accumulated by a small business designated as a Canadian Controlled Private Corporation, or CCPC. Those surpluses can be paid out as tax-free capital dividends to shareholders.
Canada’s Income Tax Act (ITA) is based on an integration framework. Though not without shortcomings, its primary objective is to maintain consistent taxation for income, regardless of whether it is earned directly by an individual or generated by a corporation and subsequently distributed to an individual. The CDA and other mechanisms, such as the dividend tax credit and refundable dividend tax on hand, constitute a critical element of this system.
The CDA enables private Canadian corporations to allocate specific non-taxable amounts, such as life insurance death benefits, to this account, facilitating tax-free distribution to shareholders. Another instance of income eligible for CDA credit involves the surplus of the non-taxable portion of capital gains exceeding the non-deductible portion of capital losses. The CDA enables the strategic organization of tax-efficient asset transfers from the corporation to its beneficiaries. Additionally, it provides an effective planning mechanism to minimize personal taxable income when used appropriately.
Comprehending the concept of the CDA is crucial; however, leveraging it in your tax planning requires a financial planner who can collaborate seamlessly with your accountant. I highly recommend consulting an expert before implementing any novel financial strategies.