The Capital Dividend Account and Leaving Canada

When deciding to move from Canada to the US, there are many important cross-border tax considerations to make. Owning a Canadian corporation introduces yet more complexity into the mix. One of the most important considerations for the shareholder of a Canadian corporation contemplating a move south of the border revolves around how to effectively and tax efficiently manage the assets in your corporation.

Because of the personal departure tax paid by Canadian taxpayers upon their exit from Canada detailed in a previous blog (https://mcacrossborder.com/how-will-departure-tax-impact-me/), it is extremely important to understand what the value of your corporation is for Canadian tax purposes since the value of your shares is subject to departure tax. It then becomes equally important to understand how to shift that value out of the corporation where possible to minimize both departure tax and the potential for double taxation in the future as a US resident.

Among many other strategies we use to help shareholders of Canadian corporations effectively manage cross-border tax issues, a key component of any plan involving the owner of a Canadian corporation exiting Canada is understanding the Capital Dividend Account (‘CDA’) and the differing treatment for residents and non-residents of Canada.

The CDA is a special notional corporate tax account that works by giving shareholders designated capital dividends tax-free. The idea was put into place to help realize the Canadian government’s vision of tax integration, which states that the after-tax value of the income earned by a corporation resident in Canada then paid out as a dividend to an individual should be subject to the same total tax rate as if the individual earned the income personally.

When a company generates a capital gain from the sale or disposal of an asset, 66.67% (as of the new capital gains inclusion rate of June 25, 2024) of the gain is subject to capital gains tax. The non-taxable portion of the total gain realized by the company is added to the CDA.

A key cross-border implication of the CDA is that capital dividends cannot be paid out tax-free to non-residents of Canada. Any capital dividend paid out to a non-resident beneficiary must have 25% Canadian tax withheld at source. This, in essence, leads to an over taxation of funds if a Canadian corporation realizes a capital gain, and then pays out its CDA account to a non-resident. Pre-departure planning is therefore crucial to ensure that any capital dividend account balance gets paid out prior to the shareholder’s exit from Canada.

As you can see, it is vitally important to understand how assets within a Canadian corporation will affect an expected exit from Canada of the owners. The CDA is just one of the many considerations that must be understood, and a cross-border move for any Canadian owning a Canadian corporation can be complicated and impactful. As such, it is always advised that you proactively consult cross-border tax professionals when planning any change in residency.