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
If 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.
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I have put $200000.00 into my shareholder loan from my personal account over the years and would like to get my money back out? How do I do this?Do I just write myself cheques from the Ltd account to personal account??This is not taxable income is it??
@Linda,
You lent the company money and it is paying you back. As long as the payment extinguishes the debt then the company writes you a cheque.
The only watch out is that if the loan was for $200,000 and the company gives you and amount less than $200,000 and you “forgive” the difference, there will be tax consequences to the corporation.
I am doing the books for a society and they recieve respite funds from the provincial goverment each month for their disabled daughter.They hire subcontractors(caregivers) and pay from the repite funds.Are these funds taxable to the caregivers??Also do they have to do a T4 A for these caregivers even though they are subcontractors.
Hello Linda
Yes the payments to the caregivers would be taxable income. If the caregivers are employees of the family, and the family should issue a T4.
If the caregivers are independent contractors, then it is the responsibility of the caregiver to declare and pay tax on income.
I have a exchange student that I recieve money each month for.Is this taxable and also if it is what can I deduct for expenses then?
@Rhonda,
I assume that it is for rent and board. The yes, the payment is more than likely taxable. There may be some exceptions and I would suggest that you obtain advice from your own accountant on this matter.
I was wondering if you used money from the shareholder loan to contribute to RRSP’s, do you still receive a tax break on your personal taxes?
Curious,
The shareholder loan and the RRSP contribution are separate transactions. Certainly, if the loan is included in income and the taxpayer then makes an RRSP contribution for the same amount (assuming there is enough contribution room), then there is an offset.
Can a sole proprietor (unlimited) invoice (including gst) their own limited corporation to transfer money from the corporation to the individual – the individual’s sole proprietorship then pays the tax/hst/cpp on that money?
The pre-G/HST “invoice” amount would be taxable income to the individual. The individual would then be required to pay income tax on that income and pay the employer and employee CPP premiums on that income as well.
It is far easier to simply pay a salary.
I have been a sole proprietor for years and I had to incorporate in order to get a specific contract. I incorporated separately and I’m still billing some clients as a sole proprietor (as that’s how the contracts were set up). I normally bill my clients and then pay tax/hst/cpp on that money. Now I have some money being paid to the corporation – I’m wondering how paying myself a salary is actually easier than essentially doing what I always do except now my sole proprietor company is billing a corporation I own directly rather than billing my clients directly as a sole proprietor? I certainly don’t want to be setting up a payroll account etc.
It doesn’t really matter what you do: Pay yourself a salary, bonus, take a shareholder loan or invoice the company. It’s all going to be taxed in your hands.
You will be required to file a T2 corporate tax return and keep the books for the corporation anyway. You might want to run all of your business as a corporation and they yourself a dividend. The effective tax rate depending on your province can be quite low.
Thanks Tax Guy- just wanted to make sure it was okay to invoice my corp from my sole proprietorship – will look into dividends further.
When you buy tires,tarps,chains etc for your Semi Truck do you write these off as Repair & Maintenance or do you capitalize them?This is a Ltd company?
Linda,
These are most likely maintenance items and an expense.
medical expenses is .52 per km for travel and 3 X $17.00 for meals for out of town appontments.
Is this coreect??
I would refer either to CRA document T4044 (Employment Expenses) or T4103 Employers guide to taxable benefits.
If I am billing someone from Alberta that does not have hst,do I just charge the Alberta/rateGST 7% for that province?? I am in BC
Linda,
I am not familiar with excise taxes. That is a different animal than income tax. Bui I can say, the GST rate for Canada is 5% not 7%.
I HAVE A BOOKEEPING BUSINESS THAT I RUN OUT OF MY HOME AND MY HUSBAND HAS A SMALL CONTRACTING BUSINESS THAT HE RUNS OUT OF THE SHOP NOW THAT HE HAS RETIRED FROM WORK.CAN WE BOTH TAKE A PORTION OF THE HOME EXPENSES??
You can claim a portion of your home for business expenses if it is either your principal place of business or you use the particular space in your home only for earning business income. See: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/t2125/ln9945-eng.html
Note that if you claim capital cost allowance against your principal residence you may lose a portion of your principal residence exemption on the capital gain.
My warning sign says to claim a eligible dependant?
Married couple with 3 dependents and both have income around $50000.00 each???
Hello Linda,
I don’t understand your question or how it related to drawing funds from a corporation.
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