Private corporations have a notional account called the capital dividend account (CDA). The CDA creates a unique financial planning opportunity for business owners when it comes to philanthropic tax planning and makes charitable giving through a corporation extremely attractive.

The CDA does not appear on the corporation’s balance sheet and is a notional account that keeps track of the amounts that are eligible to be flowed to a shareholder on a tax-free basis, and is a cumulative total that is often recorded in the notes to the financial statements. The CDA is a very important notional account as it allows a shareholder to withdraw funds on a tax-free basis from the corporation.

When a publicly traded security is sold by a corporation, 50% of the capital gain is taxable as income. The remaining 50% is not taxable and is credited to the CDA account.

When publicly traded securities with accrued gains are donated to a charity in kind, the CDA is credited with the non-taxable portion of the capital gain. Since donation of securities in kind to a charity eliminates 100% of the capital gain, 100% of the capital gain will be credited to the CDA account in this case. Therefore, by donating securities in kind to a charity, the entire capital gain can be withdrawn on a tax-free basis from the CDA account.

The ability to extract money on a tax- free basis from a corporation through the CDA, is a major consideration for shareholders as to where the source of the charitable gift should be.

The proceeds of a corporately owned life insurance policy also flow through the CDA account and can be paid to the shareholders on a tax-free basis after deduction of the adjusted cost base of the policy. Using life insurance in combination with donation of securities in kind by a corporation can result in a powerful strategy for reducing taxes while maximizing the impact of your philanthropy.

To find out more about financial planning strategies that can maximize the impact of your charitable donations and significantly reduce your taxes, contact me for a complimentary review of your financial plan.

Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. Insurance products and services are provided through Assante Estate and Insurance Services Inc.

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