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Corporate Debt Questions
• Does your client have any corporate debts?
• Are they insured?
• Who is the beneficiary on the policy?
• Will the policy create a Capital Dividend Account Credit?
• What is the Capital Dividend Account?
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Capital Dividend Account
• Why we have it– Based upon the principle of integration– Income earned by a private corporation and
distributed as a dividend to its shareholders is “supposedly” subject to the same amount of tax as if the shareholder earned the funds directly
• CDA is a mechanism to accomplish this
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Capital Dividend Account
• The purpose of the CDA is to keep track of certain amounts received by the corporation that if received by the shareholder directly would have been free of tax– Non-taxable portion of capital gains
– portion of life insurance proceeds payable at death
• These receipts can be passed through to the shareholder on a tax-free basis
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CDA - Did you Know
• CDA only available to private corporations, public companies do not have CDA
• CDA credit is equal to death benefit less the ACB of the policy
• ACB is generally equal to (issued after Dec 1/82) premiums paid for the policy, less NCPI (net cost of pure insurance)
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Collateral Insurance and Maximizing the CDACollateral Insurance and Maximizing the CDA
Shareholders
Annual Tax Savings
(Premium/NCPI) CCRA
Bank
Life Insurance Policy
(from a life insurance co.)
Business Loan
Collateral
Assignment (required)
OPCO
Stage 1: During LifeStage 1: During Life
Stage 2: Death of a ShareholderStage 2: Death of a Shareholder
Remaining Shareholder
CCRA
Bank
Life Insurance Policy
OPCO
Business Loan Repaid
Life Insurance Proceeds
Tax Savings on future Dividends
CDA Credit
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Collateral Insurance and the CDA
Insurance through Insurance through
a Bank an Insurance Co. Loan Amount $500,000 $500,000
Death Benefit Amount$500,000 $500,000
Loan Amount after Death Benefit $0 $0
Credit to CDA $0 $500,000
Future tax savings from CDA $0 $160,000(32%)
Collateral insurance should be purchased from a life insurance company and collaterally assigned to be eligible for a CDA credit.
LifeInsurance Policy