The non-taxable portion of a capital gain realized by a corporation can be distributed by means of a special dividend referred to as a "capital dividend". Capital dividends received by a shareholder are fully exempt from tax.

The amount of tax-free capital dividends available for distribution is accumulated in a corporate tax account referred to as the capital dividend account. The capital dividend account is a running balance that includes the non-taxable portion of capital gains less the non-allowable portion of capital losses. To ensure that the amount paid out is maximized, pay out capital dividends when capital gains are realized and before any capital losses are realized.

The corporation paying the capital dividend must file an election with the CRA on or before the earlier of the day the dividend becomes payable, or the day any part of the dividend is paid.

Other receipts can also add to a corporation's capital dividend account, such as certain life insurance proceeds and the net non-taxable portion of income inclusions arising from dispositions of eligible capital property.  If you would like more information about paying a capital dividend, seek the advice of a Chartered Accountant.

Information for Tax Tips is provided as a public service by the Chartered Accountants of British Columbia.