Canadian Tax Matters reposted this
There has been growing discussion regarding the impacts on the Capital Dividend Account (CDA) in light of the draft legislation concerning the capital gain inclusion rate changes. The CDA can be calculated at any point, but the draft legislation uses a mixed inclusion rate that isn't known until the corporate year-end. For instance, consider a corporation that had a capital gain in March 2024 (before the budget was released) and paid out a capital dividend equal to 50% of the capital gains realized. If that same corporation recognized a capital gain after June 25th, the mixed inclusion rate would be higher than 50%, meaning that, at the time of the CDA payment, an excess CDA was paid (which can attract penalties). This interaction between the draft and existing legislation is technically correct. However, I expect Finance to address this scenario. I caution to any owners of or advisors to CCPCs when considering recognizing capital losses on/after June 25th in the same corporate tax year where capital gains were recognized before June 25th. This action could result in a reduction to the CDA account or increase the negative opening CDA balance. If practical, consider delaying capital losses until the following corporate tax year. For example, if a corporation recognized a $100,000 capital gain before June 25th and a $90,000 capital loss after June 25th in the same corporate tax year, the CDA account would be $5,000. However, if the corporation recognized a $100,000 capital gain before June 25th and a $90,000 capital loss in the following corporate tax year, the CDA account would be $20,000. The image below shows the calculations in TTI's Corporate Tax Scenario solution. https://lnkd.in/gc3bgaPJ When making decisions regarding capital losses, one should consider the impact on the CDA for both the corporation and its shareholders. To learn more about the legislation that changes the capital gains inclusion rate from 1/2 to 2/3, Kim G C Moody and I recently led a 75 minute webinar for Canadian Tax Matters. Net proceeds are being donated to local Canadian charities. https://lnkd.in/g-VJx-CY