Here’s a search-friendly blog post I wrote for a personal finance blog in Canada. The target audience was everyday investors who may just be starting out or not that far along in their investment journey.
Client Brief: Create a 700-word SEO-optimised listicle based on the main keyword (capital dividend election) and how it can benefit investors. Have five long-tail keywords and achieve 1% keyword density for the main keyword.
Capital dividend election is the process by which private companies elect the capital dividends to be paid tax-free to investors. This dividend will come from the Capital Dividend Account (CDA).
CDA is the principle that is applied when the two stages of taxation — tax on dividends paid to investors for a certain period and the company’s income tax, also for a certain period — are approximately the same amount if the investors earned the income by directly investing in the market.
Aside from the CDA, the two stages of taxation and the Canadian income tax rates have been designed to encourage the principle of integration.
Capital Dividend Account (CDA)
One way to track certain amounts that will be considered non-taxable to a company is through the CDA. This will also be the source of the capital dividend to be paid off tax-free to investors.
The CDA should be created before filing for the capital dividend election. It should be carefully computed, as wrong computations may be costly due to penalties. Here are some examples of possible contributors to the CDA:
- Life Insurance Proceeds: Life insurance proceeds paid to the company can be considered non-taxable, thereby qualifying for the CDA.
- Capital Dividend from Another Company: If Company A invests in Company B, and the latter pays the former a capital dividend, it will be considered non-taxable, thereby allowing it to be a part of the CDA.
The CDA comes into play in the capital dividend election. But does it really benefit investors? The answer is a resounding “yes” as it brings many benefits to investors.
1. It allows companies and investors to distinguish between profit and seed capital.
Once a company starts making a profit, it may decide to pay dividends to investors to return their seed capital. The company can use the money in the CDA rather than from retained earnings to return the investors’ seed capital. In addition to providing tax-free dividends to investors, the company’s real profits can be accurately estimated using this method.
2. Capital dividend election allows investors to receive tax-free dividends.
Paying the return of capital dividend to investors using the money from the CDA rather than from retained earnings renders it tax-free, provided that the investor is Canadian. A withholding tax applies to investors who are not from Canada. In addition, some countries impose a dividend tax rate, so it’s possible that non-Canadian investors will be taxed depending on their country of residence.
3. The CDA can be used to insure a “Key Person.”
A “key person” is an employee who has the capacity to bring in more profit and success to a company. The CDA can be used to insure the key person whose life insurance will be owned by the company. When the company claims the death benefit of the key person, it can be used to create CDA credit again.
4. Dividend tax credit eliminates the risk of double taxation.
Dividends paid to investors, when paid from the CDA, will be shielded from tax. Since investors have already been taxed during their initial investment of the seed capital, their return on capital should definitely not be taxed again. The dividend tax credit in Canada protects investors from double taxation.
5. Investors can be as involved as they want and still receive dividends.
Depending on the deal with the company, investors don’t necessarily have to be part of management or have voting power to earn income. Even investors who are not active in the company can get paid and receive dividends.
Now that you’ve learned the basics of capital dividend election, it’s time to determine if you, as an investor, can reap its benefits by collecting your dividends. Additionally, if you’re a leader in your company, you might want to get started on your tax planning soon to avoid any delays when it’s time to file your capital dividend election.
If you’re unsure about something, especially if you’re an American doing cross-border investment in Canada, it might be better to get a cross-border tax specialist in Toronto to help you figure out your taxes. Remember, when it comes to your taxes, it’s safer to ask for help from a specialist rather than be sorry because you had to pay fines.
READ NEXT: SEO Writing Sample: Tech FAQ Blog Post
Let me know what you think!