To pay out capital dividends from the CDA, you must file an election using T2054, Election for a Capital Dividend Under Subsection 83(2). The election must be filed separately from other returns, mailed to the tax services office on or before the earlier of the day the dividend becomes payable, and the first day on which any part of the dividend was paid. If the capital dividends elected are more than the CDA balance, Part III tax may be required to be paid by the corporation for the excessive dividends.
To avoid paying the Part III tax penalty, it is important to know the amount of CDA available before paying out CDA. This can be a challenge for many accountants, especially when the corporation’s filing history is not readily available.
How Do I Figure Out What the CDA Balance is?
Many accountants prepare their own CDA worksheets to track the CDA balance, up to the time immediately before the capital dividend election. Others may write a letter to Canada Revenue Agency (CRA) to confirm the CDA balance. However, the CDA balance from CRA may not be up to date since the CDA balance may change at any point in time, and thus, the CRA may not have all the information available.
What is Schedule 89?
CRA will soon have a new schedule, Schedule 89, to standardize the tracking of CDA balances. This schedule may also be used in the future for corporations to request CDA balance verification from CRA.
Currently, ProFile T2 provides a CDA worksheet to track the CDA balance as of the taxation Year End. The CDA worksheet is accessible by searching “CDA” under menu Goto > Form Explorer (or simply pressing “F4”). Once the new Schedule 89 is available, the CDA worksheet in ProFile T2 will be replaced by the new Schedule 89 in line with the upcoming standardized request process from the CRA.