In a capital divided account (CDA), how are withdrawals treated for taxation purposes?

In a capital divided account (CDA), withdrawals are treated as tax-free for taxation purposes. This treatment arises because the contributions to the CDA typically consist of after-tax dollars, and when funds are subsequently withdrawn, they do not constitute taxable income at that time. The tax-free nature of withdrawals makes the CDA an attractive option for individuals looking to access their capital without incurring additional tax liabilities.

In contrast, other options reflect different aspects of taxation that may apply in other contexts but do not accurately describe the mechanism of a CDA. For example, taxable income or capital gains taxation would apply under different circumstances, such as when dealing with investments that generate realized gains or income during their lifecycle, which is not the case with withdrawals from a CDA. Understanding the specific provisions of a CDA is crucial for effective financial planning and tax strategy.