Capital Dividend Account (CDA) – CRA tax form T2054
Not all dividends are created equal. Some dividends, eligible dividends, are effectively taxed at a lower tax rate than other dividends in the hands of individuals. Some dividends, called capital dividends, are not taxed at all when received.
A dividend that qualifies as a capital dividend, for example because it represents the tax-free portion of capital gains resized on the sale of capital property, can be paid out free of tax. There are a few potential pitfalls. There two biggest are not having enough in your Capital Dividend Account when declaring and paying the capital dividend (there are various timing rules that apply), or not filling out an election form to have a dividend be a capital dividend.
The election form is Form T2054 and can be found on the CRA website. The form is three pages long and can be a bit confusing to fill out. Seek out a tax professional to make sure that the dividend you thought was tax-free is in fact tax-free.