Hi and welcome back to the Business Career College video series. In this video, we're going to look at a higher-end financial planning concept called the Capital Dividend Account (CDA). If you're going through the Life License Qualification Program, you should have a surface-level awareness of the CDA. However, if you're going through any of the financial planning courses, the CDA is something you should be more familiar with. So, what is the CDA? The Capital Dividend Account is a notional account, which means it's not represented with real dollars. Think of it in a similar manner to your RRSP deduction limit, which is also a notional amount. Every year, you receive a Notice of Assessment stating your RRSP deduction limit. This limit does not mean you actually have that amount of money, but rather, it represents the maximum you can contribute to your RRSP for that year and deduct from your taxes. The CDA works in a similar way, as it represents the ability to do something if you have the real dollars available. The CDA is not a bank account that you can open at a specific bank, like Bank of Montreal. It is simply a notional account tracked based on some amounts paid into your business. There are two fundamental ways a CDA can be created, as well as a couple of other ways to create a CDA. However, for our purposes, the most important way to create a CDA is through a life insurance death benefit paid to a corporation. In this case, the amount of the CDA credit is equal to the total death benefit paid minus the adjusted cost basis (ACB) for that policy. If you have an ill-adjusted cost basis or a zero ACB, such as in a term policy or most T2 100 policies,...
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Are patronage dividends subject to se tax Form: What You Should Know
Worker Cooperatives Revenue Bonds are issued and not subject to a 1099–PAIR.) If we were to have written published guidance in 2024 that said patronage dividends are not subject to self-employment tax, then cooperatives with an effective rate of less than .9%, and who are not involved in large-scale farm operations, can qualify for the exemption. The IRS currently recognizes less than 1% of all cooperatives (or roughly 10,000) based on total cash receipts and self-employment taxes paid of 737 million in 2017. Worker Cooperatives Revenue Bonds A cooperative will be eligible for a self-employment tax exemption if there is less than 10% of the cooperatively owned cooperatives' total receipts less than 75,000,000 are taxable or will be made taxable, and the maximum of the following is set forth in Revenue Act of 1919 (as amended in 1971): Total Cash Receipts The tax rate will increase by five percentage points per year after 2018. The annual rate of interest paid on such bonds will be 1.875% for each year after 2018. Annual interest rate may be adjusted after the bonds are issued and not subject to a 1099-PATR. If the maximum rate for interest on tax-exempt bonds are not set forth above, then the maximum rate of interest charged may be set under such terms and conditions as the Commissioner of the Internal Revenue finds to be just and reasonable. The maximum rate of interest, if set by the Commissioner, is the same as the maximum rate charged for any investment security that receives and holds a fixed rate of return. This rate is usually equal to the excess return of the interest rate for bonds that are rated as investment grade (as that term is defined) by Standard & Poor's Financial Services Company and may be adjusted from time to time, as provided in section 4(d)(1) of the Securities Exchange Act of 1934 (as amended). Bonds for a cooperative are not taxable. The cooperative may charge only interest to the extent that the income interest exceeds its cost. The term cost is a fair and reasonable estimate of the fair market cost of the bond. The IRS has a Form 4835 on file, which identifies all dividends paid out of an interest in such interest, which include payments for patronage dividend and other cooperative management fees.
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