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Capital gain corporation tax has two halves. The company pays tax on half of the gain, and the other half builds up in a tax-free pool called the capital dividend account. On a $100,000 gain, $50,000 is taxed in the company and $50,000 can be paid to shareholders as a capital dividend with no tax for them.
What is the capital dividend account?
It’s a running balance the company keeps, and the CRA describes it as part of a system meant to let the untaxed part of a gain reach the owners without a second layer of tax. It isn’t a bank account. Nothing sits in it until you write down the amount and file the election.
The CRA lists what feeds it. The main sources are the non-taxable part of capital gains, the net proceeds of a life insurance policy the company receives, and the non-taxable part of gains passed through from a trust. Losses pull it down, because the non-deductible part of a capital loss reduces the balance.
| Event | Effect on the account |
|---|---|
| Sell shares for a $100,000 gain | Adds $50,000 |
| Sell another holding at a $30,000 loss | Takes away $15,000 |
| Net result of the two sales | $35,000 available |
How do you pay the tax-free part out?
The directors pass a resolution that names the payment date and the amount. The company then files Form T2054, the election for a capital dividend, with the CRA. Get the order right. The election has to cover a balance that already exists on the date of the dividend.
If the election is bigger than the balance, the CRA says 60% of the excess is hit with Part III tax. There’s an option to treat the excess as an ordinary taxable dividend instead, and that’s a conversation for your accountant on the day, not something to work out afterwards.
Is it better to sell inside or outside the company?
It depends, and anyone who says otherwise without seeing your numbers is guessing. Here’s one side of the comparison, a person in Ontario with $90,000 of other income who sells shares personally, worked out with our capital gains tax calculator.
| Personal gain, $90,000 other income | Extra tax | Share of gain |
|---|---|---|
| Ontario, $20,000 | $2,991 | 15.0% |
| Ontario, $100,000 | $18,536 | 18.5% |
| British Columbia, $100,000 | $16,784 | 16.8% |
The percentage climbs with the size of the gain because more of it lands in higher brackets. Inside a company the taxable half meets the corporate investment income rate. We couldn’t confirm a single combined figure per province, so we can’t finish the comparison for you. What you can do is ask your accountant for the total at both levels, company tax plus the owner’s tax when the money comes out, then compare that total with the personal column.
Ordinary dividends from the company are taxed on the owner’s return, and the dividend tax calculator shows what that step looks like. A capital dividend skips it.
When do you owe the company’s share?
The balance is generally due two months after the year end, or three months for many Canadian-controlled private corporations, according to the CRA. A sale in the last quarter can push the tax up sharply, so check the instalments early. If the company’s own profit is the bigger issue, try the corporate tax calculator for the business side.
What could go wrong?
Paying a capital dividend before the sale closes is the classic error. The gain has to be realised first, then the account has to be updated, then the election is filed.
Some owners assume the account balance is automatic on the T2 return. It’s tracked, but you’re the one who has to keep the schedule up to date, since a wrong balance is what triggers the penalty tax above.
And gains on active business assets in a company that qualifies for the small business rate aren’t always treated like gains on shares held for investment. We haven’t confirmed those rules, so get advice on the sale of a building or equipment before you assume anything.
To see how the half is calculated in the first place, go to capital gains tax on corporations, and for the inclusion rate itself see the capital gain rate for corporations.
Where the numbers come from
The capital dividend account rules, Form T2054 and the 60% Part III tax come from the CRA’s capital dividend account page. Payment dates come from the CRA’s balance-due day page. The personal tax figures come from our capital gains calculator, which uses 2026 federal and provincial tax data.
Frequently asked questions
What is the capital dividend account?
A balance the company keeps of the non-taxable part of capital gains, plus items such as life insurance proceeds. It can be paid out as a tax-free capital dividend.
Which form elects a capital dividend?
Form T2054, filed with the CRA along with a directors' resolution that names the payment date.
What happens if the election is too large?
The CRA says 60% of the part that doesn't qualify is subject to Part III tax, unless the excess is treated as a separate taxable dividend.
When is the corporation's tax due?
Generally two months after year end, or three months for many CCPCs that meet the CRA's conditions.
Is it cheaper to sell shares personally or in a company?
It depends on your income and province. We couldn't confirm the company's combined rate on investment income, so compare total tax at both levels with your accountant.
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