we are now going to talk about the capital dividend account and the reason we need to talk about the capital dividend account is that you need to have an understanding of that account and how it fits into a company's balance sheet in order to understand uh when we talk about funding byell agreements uh one of the two of the options in funding a byell agreement mean that you need to understand how a capital dividend account works so I am going to go to the board and explain to you exactly how the capital dividend account works and how that applies to life insurance we have been talking about uh using life insurance policies to solve issues that certain businesses uh occur incur and uh at one point I talked about uh having a company own a life insurance policy uh instead of an individual owning that policy and so it's important for us to understand how are life insurance proceeds treated when a company owns a policy what is the accounting that's involved uh in treating life insurance proceeds and we need to understand that so that when we talk about funding by sell agreements uh we talk about a promisory note approach or share Redemption approach we need to understand what happens on the accounting side on the balance sheet of a company so that we know how the cash flows in order to get that cash those proceeds of the insurance policy out into the hands of the individual policy owners or the shareholders and so we're going to spend some time understanding what happens to uh life insurance proceeds if uh uh life insurance if a company owns the policy and the insured life insured passes away so this is a copy uh of a a balance sheet for a company and uh you know for the accountants in the group this is going to be baby stuff but for those of us that don't have an accounting background this is in fact uh a picture of the balance sheet of a company and so in a normal balance sheet on the left hand side we have assets of the company the company may have a bank account may have a uh inventory uh it could have a building and cars and trucks and whatever and all the different assets are identified on the left hand side of the sheet and then on the right hand side of the sheet we're going to have the liabilities the debts that the company has it may have a bank loan it may have to pay staff expenses all those kinds of things uh these it may have mortgages against property it may own so these are liabilities of the company now the difference between the assets and the liabilities are the amount that's actually owned by the shareholders so the shareholders portion is in here so we can see because this is a balance sheet this side of the sheet must balance with this side of a sheet if I add money to this side I need to do something on this side to make sure that my balance sheet stays in effect for example if the company goes to the bank and borrows $10,000 on this side of the sheet I'm going to enter cash $10,000 and on this side I'm going to enter bank loan $10,000 so whatever ever I do to one side I must offset it on the other side so that this is a balance sheet now when it comes to life insurance proceeds uh what happens in an insurance uh when the the policy is owned by a corporation the insurance company still pays the death benefit in a normal fashion but they'll pay that death benefit to the company because the company is the owner of the policy and so whenever let's say the death benefit in my example is $100,000 and one of the uh the insurance life insurance passes away and so the insurance company sends a check to the uh to the uh owner which is a corporation and the check is payable to that Corporation the accountant takes that check and let's say it's $100,000 and he or she deposits it in the company's bank account so the assets of the company in my example of this Corporation go up by $100,000 because that was the death benefit and so this side of my balance sheet has gone up by $100,000 now if I'm the accountant for this company I cannot go home at night until I have balanced my books I've balanced my accounts and so because I've added $100,000 of a life insurance death benefit on this side of the sheet I need to offset that on this side of the sheet this side has to go up by $100,000 now life insurance proceeds of a special treatment under the income tax act and under the income tax act it says for a life insurance policy the way you enter the accounting is that in the the company comp's retained earnings account you put back the adjusted cost base of the policy you credit it there and for the difference between the death benefit and the adjusted cost base companies are able to set up a special account called a capital dividend account you'll see the term CDA Capital dividend account now what goes into this account is our death benefit minus the adjusted cost base of the policy so let's say for example this policy had an adjusted cost base of $88,000 as an example and it had a death benefit of $100,000 so what would happen in the accounting here we would have an entry of $8,000 to the retained earnings account and we would then have an entry of $92,000 I'm assuming my math is correct uh we will have an entry of $992,000 to the this Capital dividend account now voila our right side of our equation is now equal all the accountants can go home that night because we've balanced our books now what's very important in this special treatment for life insurance proceeds is the amount that's sitting and credited to this Capital dividend account any amounts credited to this account so for example the $992,000 can go out to the shareholders as a taxfree dividend taxfree and so all the shareholders in the company uh the company can declare a dividend and it's not a taxable dividend because it's deemed to be Capital they're getting back their capital and so a big feature of having an insurance policy owned by a corpor operation is that it has this type of a treatment and any amounts credited to the capital dividend account in this example $992,000 can flow through to the shareholders as a taxfree dividend now this is important for us to understand because when we talk about funding by sell agreements where we are going to have that agreement funded with insurance owned by a company we are going to have to understand this balance sheet treatment