- Most life insurance proceeds received by the corporation on policies where it was the beneficiary; and
- Capital dividends that the corporation received from other corporations.
The capital dividend account is computed immediately before the earlier of the time that the capital dividend became payable and the time it was paid. (It is usually payable at the time indicated by the directors of the corporation in the corporate resolution declaring the dividend.) Furthermore, the corporation must elect that the dividend is a capital dividend. This election must be filed with the CRA by the earlier of the two times indicated above.
The election is made on Form T2054, including a schedule showing the calculation of the capital dividend account balance immediately before the election. The CRA T2 Schedule 89 (Form T2SCH89, Request for Capital Dividend Account Balance Verification) can be used to ask the CRA to confirm the balance.
Late filing of the form T2054 may be allowed, but with a monetary penalty.
What if the dividend exceeds the capital dividend account?
A corporation declaring a capital dividend should have a capital dividend account equal to or greater than the capital dividend.
If the corporation makes a mistake, and pays a dividend that exceeds its capital dividend account, but still makes the election in respect of the dividend, the dividend will remain non-taxable to the recipient shareholder as a capital dividend. However, the corporation will be subject to a penalty tax equal to 60% of the excess, plus interest to the date of payment. The recipient shareholder will be jointly and severally liable with the corporation to pay the penalty.
As an alternative to the penalty, the corporation can elect to treat the excess amount as a taxable dividend, meaning that the shareholders will include that excess amount in income as a taxable dividend rather than a capital dividend. The shareholders must agree to this election.