CRA forms
Form T2054 Explained: Electing a Capital Dividend
Tax freeto shareholders resident in Canada: a capital dividend properly elected on Form T2054 and paid from the capital dividend account.
Sources checked October 20263 min read
What a capital dividend is
A private corporation keeps a notional capital dividend account. It grows mainly with the untaxed half of the capital gains the corporation realizes, life insurance proceeds it receives on certain policies, and capital dividends it receives from other corporations, and it shrinks with the non deductible half of capital losses. Paying that balance out as a capital dividend lets shareholders receive it tax free, which is how the untaxed half of a corporate gain reaches the owners without tax.
The tax free result depends entirely on the election. A dividend paid without a valid T2054 is an ordinary taxable dividend.
Key points
- Filed by a private corporation to pay a dividend from its capital dividend account
- Tax free to shareholders resident in Canada
- Due by the day the dividend becomes payable, or the day it is first paid if earlier
- Electing more than the account holds triggers Part III tax on the excess
Filing the election
The election is due by the earlier of the day the dividend becomes payable and the first day any part of it is paid. It goes to the CRA separately from any return, electronically or by mail, with a certified copy of the directors' resolution and the calculation supporting the account balance. A corporation filing for the first time, or disagreeing with the balance the CRA shows, attaches Schedule 89 to have the balance verified.
| Part | What it covers |
|---|---|
| Part 2 | The dividend amount, the account balance just before it became payable, and the key dates |
| Part 3 | Capital dividends received from other corporations |
| Part 4 | Amounts designated by a trust that form part of the account |
| Part 8 | The late filing penalty, where the election is late |
| Part 9 | Part III tax on any excess over the account balance |
Getting the amount wrong
If the election is for more than the account holds, only the balance counts as a capital dividend, and the corporation owes Part III tax of 60% on the excess. A corporation that qualifies can elect under subsection 184(3) to treat the excess as a separate taxable dividend instead, which avoids the Part III tax but leaves the shareholders taxed on that part. Because the account moves with every gain, loss and insurance receipt, the balance is worth confirming before the dividend is declared, not after.
A late election is allowed, but the corporation has to estimate and pay the penalty when it files: for each month late, the lesser of one twelfth of 1% of the dividend and one twelfth of $500.
Shareholders outside Canada
A capital dividend is tax free only for shareholders resident in Canada. One paid to a non resident is subject to Part XIII withholding tax, which a treaty may reduce, and is reported on an NR4 slip rather than left off the slips altogether.
Quick answers
Is a capital dividend taxable to the shareholder?
Not for a shareholder resident in Canada, provided the corporation filed a valid election on Form T2054 and the dividend did not exceed the capital dividend account.
When is Form T2054 due?
By the day the dividend becomes payable, or the first day any part of it is paid if that is earlier.
What happens if the dividend is larger than the account?
Only the balance is a capital dividend, and the excess is subject to Part III tax of 60%, unless the corporation elects to treat it as a separate taxable dividend.
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.