The capital dividend account (CDA) is a notional account that tracks certain tax-free amounts accumulated by a private corporation, including the non-taxable portion of net capital gains, the tax-free portion of life-insurance proceeds received on death, and capital dividends received from other corporations.
A corporation may elect, on Form T2054, to pay a capital dividend up to its CDA balance, and that dividend is received tax-free by the shareholder. The CDA is one of the more powerful planning accounts for private corporations. It is frequently central to post-mortem planning, where corporate-owned life insurance funds tax-free distributions to an estate, and to extracting the non-taxable portion of capital gains realized inside a corporation.