MAXIMIZING THE CDA

(CAPITAL DIVIDEND ACCOUNT)

If you own a holding company (commonly known as HOLDING), you should read this.

There are many interesting advantages to owning a HOLDING while you are still alive; however, be aware that, upon your death, it can become a burden on the estate. In fact, upon your death or that of the couple, the shares the children will inherit may become taxable up to 45% as a dividend. So, this poisonous gift can be resolved by using a CDA.

Without going into detail, there are a few assets that can go into a CDA and the biggest is the death benefit of a life insurance policy. Anything that goes into the CDA can be distributed tax-free to the recipients.

We often see a situation where people have accumulated a lot of assets or investments in the HOLDING and, at one point, there is so much money that we no longer want to get rid of it, because the tax bill would be too great. Also, people aged 65 and over want to take less and less risks and are looking for safer investments with fixed returns over time. The problem is that fixed income securities generate low returns and we do not know how to get out of this confinement.

The solution is to take out a PC-style (participanting contract) life insurance policy in the HOLDING and maximize the CDA. Upon death, the death benefit MINUS the ACB (Adjusted Cost Basis) returns to the CDA with no tax impact. Subsequently, Canadian resident beneficiaries will be able to receive a CDA dividend without any tax impact.

Let’s take a specific example executed in 2021. Mr. 70 years old and Mrs. 69 years old have accumulated about $10M in their HOLDING and have 3 children. Everything is invested mainly in GICs and bonds with low returns and is taxable annually. With the current strategy, their children will have to deal with a huge fiscal impact upon the death of their parents, which would greatly reduce the value of the HOLDING.

We suggested transferring the current investments in the HOLDING to a PC (participating contract) of an insurer over a period of ten years and then, assessing the impact on life expectancy in 21 years. Using very conservative data, the value of the HOLDING will increase by more than an additional $9.5M. It’s a huge strategy with absolutely no risk.