Electing Capital Dividends
Procedure for electing capital dividends:
- Complete form T2054
- Attach a copy of the calculation of the CDA computed up to time the dividend becomes payable
- Attach a certified copy of the directors’ or other authorizing resolution declaring the capital dividend
- Using the actual directors’ resolution will be considered an invalid election
The election is due by the earlier of the date the dividend is payable and date any part of the dividend is paid.
For each month the election is late, the penalty for late filling is 1/12th of the lesser of: 1% of the capital dividend and $500
The election to pay a capital dividend must be made on the entire dividend (it cannot be on part of it).
- The dividend could be the result of redemption of shares but if the dividend on the redemption exceeds the CDA, separate redemptions are necessary.
CRA has said it will, as a courtesy, confirm the CDA balance once for every corporation.
Part III levies a tax of 60% of the amount of any excess dividend.
- Part III tax can be avoided by electing, with the concurrence of all shareholders, that the excess amount is a taxable dividend
- The election is due within 90 days after the Part III assessment
Sam Faris is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters and handling disputes with CRA.He also published an article recently in the business magazine: HERE.