Tax integration is the basis of Canada's taxation of private corporations. With this integration, CRA has attempted to equalize the tax paid when a shareholder receives money. When a private corporation earn's income and subsequently distribute that to its shareholders the tax should be the same as if the shareholder had earned it directly.
In the same manner, if a shareholder received a tax-free sum of money, that same money would be tax-free still if it had first flowed through the corporation and then to the shareholder.
A notional account, the capital dividend account has been created to track these amounts being passed to shareholders. Essentially allowing a tax-free dividend for any qualifying money. An example of this would be life insurance proceeds (death benefit) where the beneficiary of the policy was the corporation.
For more detailed information on the Capital Dividend Account, please see the document published by CRA titled INCOME TAX ACT Capital Dividends - IT-66R6.
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