The capital dividend account is the most useful account in your corporation, and there is a good chance nobody can tell you what is in it.

It is not a bank account. Nothing sits in it and it earns nothing. It is a running tally your corporation keeps of the amounts it is allowed to pay you with no tax at all. The non-taxable half of capital gains goes in. Capital dividends received from other corporations go in. Most of a life insurance death benefit goes in. When the tally says there is room, your corporation can pay you a capital dividend and you receive it tax-free.

Two catches explain why it is underused. First, the CRA does not track the balance for you. Your accountant has to rebuild it from years of records, and in most files I review, nobody has. Second, the payment only works if the paperwork is filed on time. Pay out more than the account holds and the excess is taxed heavily. So the balance sits there, real money that could come out tax-free, unused because no one owns the job of tracking it.

When I review a corporate structure, the capital dividend account is one of the first things I ask about. The answer is usually a shrug. That shrug is expensive.