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Capital Dividend Election in Canada

tax accountant canada

Capital dividend election in Canada is a provision that allows Canadian-controlled private corporations (CCPCs) to distribute tax-free dividends to their shareholders from the corporation’s capital dividend account (CDA). The purpose of this election is to provide a tax-efficient way for CCPCs to distribute funds to their shareholders.

Here are some key points to understand about the capital dividend election:

  1. Eligibility: To be eligible for a capital dividend election, a corporation must be a CCPC. Generally, a CCPC is a private corporation that is resident in Canada, is not controlled by non-residents or public corporations, and meets certain ownership and business activity criteria.
  2. Capital Dividend Account (CDA): The CDA is a notional account that keeps track of the corporation’s tax-free surpluses. It consists of various items such as the corporation’s non-taxable portion of capital gains, life insurance proceeds, and certain other tax-free amounts. The CDA balance is determined at the end of each tax year.
  3. Tax-Free Dividend Distribution: When a CCPC makes a capital dividend election, it can distribute tax-free dividends to its shareholders up to the balance in its CDA. These dividends are not subject to income tax in the hands of the shareholders.
  4. Limitations and Restrictions: The capital dividend election has certain limitations and restrictions. For example, the election cannot exceed the balance in the corporation’s CDA. Additionally, the election must be made in writing and filed with the Canada Revenue Agency (CRA) within a specified timeframe.

Here below are the steps to file a Capital Dividend Election;

1- In order to issue the tax-free dividend to the shareholder, the form T2054 (Election for a Capital dividend Under Subsection 83(2)) should be filled out and signed by the authorized signing officer. It has to have the physical signature.

2. Schedule 89 needs to be attached with the signed T2054. 

3. Furthermore, a signed copy of the certified Director’s Resolution needs to be prepared. 

4. Finally, mail out the signed Form T2054 attached with the certified Director’s Resolution and the Schedule 89 to the tax service office that the corporation belong to.

No response after filling means that CRA hs accepted the Election. And after that waiting time we can declare the dividends.

Contact Abdullah CPA for the Filling Capital Dividend Election in Canada.

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