“It may be prudent to consider paying a capital dividend prior to realizing these losses..”
Many companies are repositioning their investment portfolios, or experiencing foreign exchange losses that are capital losses. Accessing the tax savings from carrying the resulting losses back against prior years’ capital gains can be an important source of cash flow.
Generally, tax-free capital dividends can be paid to resident shareholders up to the balance in the capital dividend account immediately before the dividend becomes payable. The capital dividend account balance is reduced when capital losses are realized. Accordingly, it may be prudent to consider paying a capital dividend prior to realizing these losses.
Capital dividends can be paid in various ways, including cash payments, credits to shareholder loan accounts and redeeming shares that give rise to a “deemed dividend.”
While cash flow may be at a minimum, a capital dividend need not be paid in the form of cash. It may be paid by crediting an amount payable to the shareholder. Whether the capital dividend is paid in cash or by increasing the shareholder loan, payment of a capital dividend prior to the realization of the losses is a wise idea. The ability to take cash out, tax free, when it is available is a valuable benefit.
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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.