One of the biggest secrets that successful business owners and entrepreneurs often don’t know about is the capital dividend account. The capital dividend account is a notional account, which means you will not see it unless there’s a balance. It allows for life insurance proceeds and the tax-free portion of capital gains to flow out of your corporation tax-free.
The reason we call it one of the best-kept secrets for business owners is because almost nobody is using it. If you are a successful business owner and you have cash sitting in your corporation, we highly recommend that you start taking advantage of that capital dividend account.
Here’s an example to help illustrate the power of a capital dividend account:
Let’s say you have $100,000 in retained earnings and you invest that in stock or corporate class mutual funds, or in an account that earns capital gains, what actually happens is that the capital gain in that account that grows tax-free, can also flow out of the account tax-free.
For example, if the $100,000 that you initially invested grows to $400,000, you have a $300,000 capital gain. That means that $150,000 (50%) is a taxable capital gain, the other $150,000 you can actually take out of your corporation through a capital dividend account election completely tax-free.
So if you’re not utilizing the capital dividend account, make sure that you look at it, talk to your accountants, talk to your financial advisor, ensure that you are maximizing the use of that capital dividend account to ensure you are winning and not CRA.
If you want to learn how to effectively structure your corporation and make sure you are taking advantage of a capital dividend account, book a call, we’d be love to run you through our full financial planning process.