Steeve Vachon
Partner | CPA, CGA, M. Fisc. | Tax

Several mechanisms exist to reduce tax on capital gains. The capital dividend account (CDA) is particularly efficient. However, company shareholders do not seem to use it as much as they could. All it takes is sound planning.

The CDA is a mechanism provided under the Income Tax Act. It enables private companies (not public companies) to distribute tax-exempt amounts to shareholders. Though it is very efficient, use of the CDA must follow certain criteria.

The CDA in detail

The CDA is a type of account solely used for tax purposes. It is not a bank account and does not appear on the company balance sheet. This account contains a certain number of elements, including the following main ones:

• Excess of the non-taxable portion (50%) of capital gains over the non-deductible portion (50%) of the company’s capital losses;
• Dividend from other company CDAs;
• The proceeds from the company’s life insurance that exceeds the adjusted cost base (ACB).

Acting at the right time

The CDA is only useful if the company realizes gains, as shareholders may only receive payments when such is the case. If the company has losses, the amounts accumulated in the CDA will be reduced by the amount of these losses. This is why it is important to verify the CDA balance periodically because, from one year to the next, base on the company’s profitability, shareholders could withdraw tax-sheltered amounts.

The CDA and company life insurance

The CDA can also be used if the death benefit is paid to a company under a life insurance policy. In such cases, the amount payable to the CDA corresponds to the amount of the life insurance contract of which the company is a beneficiary that exceed the ACB. Significant amounts can therefore be tax-exempt through the use of this mechanism.

To take full advantage of this mechanism, appropriate planning is necessary, especially if share transfer is planned. Major amounts are at stake in such cases and the CDA can facilitate the transition between the seller and the buyer.

Lastly, it is important to fill out the required forms before proceeding with paying out the CDA dividends. Do not hesitate to call on our experts to determine the best strategies. They know the details of various programs well and can easily use them to your advantage.

30 Apr 2012  |  Written by :

Mr. Vachon is a partner at RCGT. He is your expert in taxation for the Sainte-Marie office. Contact...

See the profile

Next article

Pierre Fortin
Partner | CPA, CA | Management consulting

Although they often work in the background, municipal general managers play an essential role.

This is particularly true for small municipalities that rely on reduced administrative teams and elected officials that often only work part-time. Municipal general managers ensure that municipalities are managed consistently and continuously, which makes their role all the more important.

Whether their work involves liaising with the municipal council and administrative team, providing strategic information so that the mayor can make informed decisions, or ensuring, alongside the team of civil servants, that actions are carried out in compliance with the multiple laws that apply to the municipal sector, general managers play a major role. For efficient municipal management, roles and authorities must be clearly defined, particularly for elected officials, civil servants and the general manager.

Complex Issues and Multiple Solutions

Managing a municipality is no simple task. There are often complex issues, numerous stakeholders and conflicting interests. The needs of citizens and businesses are becoming more costly, while municipal funding sources are lacking and closely tied to property tax revenue. It’s worthy to note that general managers in smaller municipalities often carry out more than one role; some even take on secretary-treasurer and public works manager tasks, among others.

As municipalities are given greater powers, their management becomes increasingly complex, yet the expertise required to carry out such tasks is not systematically available. This can represent a major challenge.

Although municipalities may have multiple issues, solutions must be adapted to each specific situation. However, it’s impossible for municipal administrative teams, under the leadership of a general manager, to be specialists in all areas. Solutions are developed on a case-by-case basis and often rely on examples from other municipalities, or even other countries.

Under the Spotlight

Indeed, few Quebec organizations are subject to as many audits as municipal authorities. In addition to all of the legislation and regulations municipalities must comply with, they must also report to various government authorities, and have a close relationship with their citizens who legitimately expect high-quality local services and unfailing management of public funds.

In light of this context, municipal managers need people they can count on. They must be supported, be able to count on a team of specialists who can provide appropriate information, and occasionally must call upon external or more knowledgeable resources so that decisions can be made in the interest of citizens and the municipality.

Major municipal projects must be carried out in close collaboration with municipal authorities, the general manager and civil servants. While municipal general managers often work in the background, their role and teams are indispensable for the long-term development of local municipalities and communities.

Article paru dans Magazine SCRIBE en 2012.

16 Apr 2012  |  Written by :

Pierre Fortin is a partner at Raymond Chabot Grant Thornton. He is your expert in Management...

See the profile

Next article

A majority budget: on the road to a surplus for 2015-2016

Today, Canadian Finance Minister, the Honourable James M. Flaherty, presented the first budget of the Conservative majority government; his objective is to generate a $3.4 billion surplus as of 2015-2016.
Spending cuts will achieve savings of about $5.2 billion, representing less than 2% of program spending in 2016–17 or 0.2% of Canada’s GDP that same year.

Compared with other G7 members, Canada has fared well, despite the debt crisis and European banking crisis that continue to undermine the world economy. While Canada expects modest growth in the short term, the government has chosen to support business and entrepreneurs directly by encouraging innovation and prosperity.

To support research, innovation and entrepreneurship, the 2012 economic action plan will provide $1.1 billion over five years in direct research and development support and $500 million in venture capital. However, the significant Scientific Research and Experimental Development (SR&ED) Tax Incentive Program will unfortunately see a $1.33 billion reduction in business credits over five years. The SR&ED measures are summarized in this document.

Other measures include $165 million over two years for natural resource development and a streamlined review process for major economic projects in order to reduce red tape, encourage investors and contribute to the economic viability of major projects.

Lastly, one measure that affects all Canadians is the gradual increase of the Old Age Security age of eligibility from 65 to 67 for anyone born after March 31, 1958.

Please contact us for more information on the tax measures in this bulletin.

Next article

Five ways to plan long-term resources more easily

For many years, municipalities have been faced with major management challenges. With ever-increasing operating costs, as they are called upon to provide more and more services to their citizens (i.e. transportation, road networks, leisure services, etc.), their revenues in the meantime, almost exclusively derived from property taxes, struggle to keep up. As a result, municipalities are often faced with shrinking flexibility.

Not only that, but the situation doesn’t seem likely to improve over the coming years, as upper government echelons seem disinclined to help out with the budgetary imbalance. In this context, careful investment planning is one of the best solutions for municipalities to achieve their development projects.

Significant Investments

Due to this imbalance between the financial needs of municipalities and their inability to pay, a major deficit in infrastructure maintenance has accrued over the last few years. While contributions from upper government echelons have helped to rebalance the budget to a certain extent through the implementation of a municipal infrastructure program, municipalities continue to face major challenges since the federal program nevertheless requires that they pay at least a third of project funding. Naturally, such expenditures can be quite significant for smaller municipalities.

Municipalities are also confronted with other challenges concerning new expenditures. For example, with reference to environmental protection and sustainable development, Quebec’s new Residual Materials Management Policy has set some ambitious objectives for the coming years, including banning the disposal of residual organic materials in technical landfill sites as of 2020. However, major equipment and operating cost investments will be required to achieve these objectives.

With respect to public safety, implementing the risk coverage plan will also require investments and additional resources for certain municipalities.
Like so many other organizations, municipalities are faced with labour shortages and salary competitiveness, in addition to facing major unfunded actuarial liabilities in their employees’ pension plans. In such situations, municipalities often have to grapple with complex management issues where the revenues generated by their property taxes have hit their limit.

So, how can a municipality be sure that it’s providing sufficient services while taking into account taxpayers’ ability to pay? And how can it be sure that it’s implementing the best financial strategies and financing the most advantageous projects while maintaining a reasonable debt level?

Long-term strategic financial planning

Long-term financial strategic planning is definitely the route to take. It allows elected officials and municipal management to develop a shared vision of a municipality’s priorities and issues. This approach also makes it possible to get a clear picture of operating costs, required investments, impact on the municipality’s debt and, incidentally, how its residents should be taxed. This shared vision helps the municipality to be proactive in developing the best tax strategies for its citizens.

Here is brief summary of the five steps necessary for conducting long-term financial planning:

  • Establish financial principles to guide investment decisions;
  • Identify and document all projects and new activities that may affect the municipality’s finances;
  • Define various hypotheses on which to base financial projections;
  • Simulate results based on all projects and new activities to be implemented and then analyze the impact on debt servicing, expenditure progression and taxes;
  • Establish the municipal administration’s financial strategies.

Considering the financial challenges of certain municipalities, this kind of planning can become an indispensable tool. In addition to helping prepare annual budgets, it is completely in line with modern approaches to municipal governance. And especially, beyond the fact that it encourages efficient resource management, it has the advantage of providing transparent management of municipal public finances.