The Account Every Incorporated Doctor Should Know
The Account Every Incorporated Doctor Should Know:
Capital Dividend Account
One of the triggering moments for me to start my deep dive into finances came from consideration to execute a corporate surplus strip on my med co. So many of my colleagues seemed to be doing it, maybe it was the right move for me as well. ‘You could save thousands of dollars in taxes!’ they all said. At the time, I knew very little about finances, and was relying heavily on my accountant, tax lawyers, and financial advisors for guidance regarding this decision. The problem was that each professional had varying and somewhat opposing views. Who was I supposed to believe? How much of the advice that each professional was giving was self-serving?
The only way I knew how to come to a confident decision was to get my accountant and financial advisors in the same room with Jerome and me. This way, we could hear their points from both sides and listen to the justification of their answers and how the other party would respond. It was this in-person real-time meeting that taught me a couple of valuable lessons.
The first lesson I learned the hard way was that not all accountants practice accounting in the same way. I had the false assumption that if you submitted the same numbers to 5 different accountants, eg the amount of income earned, a list of expenses, RRSP contributions, etc., they would all produce a very similar result wrt how much taxes I owed.
I couldn’t have been more wrong.
The difference in accountant practice can cost you tens of thousands of dollars (I’ve seen more with colleagues), whether that be loss in tax deferral power, unnecessarily higher tax bills, or both. For us, this mistake bled us $70k (To this day, I try not to think too hard about what we could have done with that $70k instead).
There were a lot of acronyms floating around that I didn’t understand during that group meeting. These include what I called alphabet soup: CDA, GRIP, and RDTOH. And it was these acronyms where differences in accountant practices became apparent.
CDA, aka capital dividend account, in a lot of ways, is not an account at all. When I think of the word account, I think of a chequing, savings, or an investment account - a place where our hard-earned money resides. But no actual monies are housed within a CDA; it’s what is known as a notional account. I consider it more like a tracker or running tally that the government has on a portion of all the profit and losses you’ve experienced by selling certain investments inside your corporation.
Without getting into the nitty-gritty, these are the top three things you should know about the capital dividend account:
You could have thousands of dollars sitting inside your CDA that you could pull out tax-free.
Your accountant is not obligated to tell you about this account, and you do not automatically get this tax-free money handed to you.
If your financial advisor is not aware of the many ways the CDA can help with investment planning, then you are prolonging your retirement more than you need to.
Enthusiastic to learn more? Join me for a live webinar on Monday, April 28th, or Tuesday, April 29th, at 7 p.m. for a thirty-minute presentation where I will unpack these points and teach you how to make the CDA work for you.