7 Ways To Get Money Out of Your Corporation

by Tax Guy - Burlington Accountant on January 27, 2010 Print This Post Print This Post

If you have a small business corporation, you may be receiving income in the form of salary or dividends. However, there are other ways of getting money out of a private corporation that may be more tax efficient. Here is a list of the seven most common ways to get money out of your corporation.

1. Salary

If you are an owner/manager, you can pay yourself a salary. The salary is taxable in your hands at your marginal tax rate, but it is deductible by the corporation. This may not seem to make sense: Why would you chose to pay tax at the higher personal rates rather than the small business rates? You should pay yourself enough to generate the maximum RRSP contribution room. Even if you don’t intend to use the RRSP room now, this may be beneficial in later years if you want to make RRSP contributions or if the business wants to establish an individual pension plan or IPP.

In addition, you will also pay into the Canada Pension Plan that allows you to draw on those benefits at retirement.

2. Bonus

Man Holding Keys To The BusinessIf your corporations’ income is more than $500,000 or if your company’s earnings are volatile you might want to pay yourself a bonus instead of a salary. The bonus is treated the same as employment income for tax purposes but provides more flexibility in payment.

The bonus may also be used to bring the corporations income below the $500,000 small business deduction limit to maximize the use of the lower tax rates on corporate income.

3. Dividends

Dividends are paid from the corporations after tax-income. For most Canadian small business corporations, the dividends paid are ineligible dividends and subject to a 25% gross up and a 13.33% tax credit on the grossed up amount. This gross-up and tax credit system is designed to eliminate double taxation.

4. Payments on Loans From Shareholders

You can invest in a corporation through investments in shares or by lending the company (or any combination). If you lent money to the corporation, the repayment of the principal amount is tax-free.

5. Capital Dividends

Canada only taxes 1/2 of capital gains. When a corporation realizes capital gains, the non-taxable half of the gain is credited to a notional Capital Dividend Account. The balance of the capital dividend account may be paid to the shareholders entirely tax-free.

6. Repayment of Capital

The amount you originally invested in your corporation is credited to an account called paid up capital. The balance of this account can be repaid at any time tax-free. Keep in mind, that doing so may have other tax consequences later on, so speak with your accountant.

7. Loans To Shareholders

I have written about the concept of shareholder loans in the past. If structured correctly you may be able to extract funds temporarily from your corporation.

Get Help!

If your accountant has not discussed any of these with you, we should talk! Contact me today to find out how you can maximize your cashflow and pay less tax.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

Print This Post Print This Post

{ 61 comments }

Will December 26, 2012 at 12:14 pm

Good day Tax Guy,

I just incorporated a company and my projected monthly income should be over $16000, i will be using my personal vehicle and tools for company use(welding truck) until i can sell it to the company, i was wondering what is the monthly allowance on the km usage at .52 per km? and also if i lease my equipment and truck to the company if that would be deductible from the corporate expenses but im assuming ill have to pay personal tax on it since its an earned income. Thank you for any help you can provide as i am still learning

Tax Guy - Burlington Accountant December 27, 2012 at 7:27 pm

Your likely better off rolling the assets over to the corporation under s.85(1) rather than leasing it. Leasing will trigger taxable income.

Maggie January 29, 2013 at 12:27 pm

Thanks for the explanation but – don’t get something: Example: let’s say income into a PC in 2013 will be $200,000.00. Shareholder has a CDA with a credit of $100,000.00. If shareholder writes self a check for $100,000 as repayment of amount payable in CDA, what numbers are declared on 2013 taxes? If Capital Dividend is tax free – then gross income should be $200,000? HELP – and thank you! M (Basically – what amount will taxes be paid on in 2012?)

Tax Guy - Burlington Accountant January 29, 2013 at 6:29 pm

Hi Maggie,
Only the corporation can have a CDA balance. If it does, it can declare a tax-free dividend up to the value of its CDA balance. The dividend is tax-free to the shareholder.

Margo February 5, 2013 at 10:56 am

I’m not an accountant, nor even much of a book-keeper. For this capital dividends account; Say company earnings for year X are $250000. Salary is paid out at $120000. Does that leave us $65000 within the CDA account that can be drawn upon tax free, within the same year?

Burlington Accountant February 5, 2013 at 11:01 am

Margo,
When the company sells a capital asset such as a machine or a building for a profit then the resulting gain is capital. One half of the gain can be drawn tax-free.

james June 14, 2013 at 2:43 pm

Hi, I just started a new corporation, and my estimated income as a consultant would be approx 700000/ year. can my corporation buy or lease a car and write it off, and if the employee/ (me) uses it for personal use will i have to claim a taxable benefit?

Tax Guy - Burlington Accountant June 20, 2013 at 6:33 am

The car is a deduction for the corporation and yes, there will be a taxable benefit to you for personal use.

Comments on this entry are closed.

Previous post:

Next post: