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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The shareholder of a corporation may pay him or herself a car allowance for the business use of his or her personal vehicle. Currently the rates given by the CRA are $0.52/km for the first 5000km and $0.46/km thereafter. The result is an expense to the corporation and the shareholder receives the money tax free.
@Allan – Good one. Thanks
If you are an owner-manager and have a company owned automobile, consider paying yourself a tax free automobile allowance. This is an excellent way to extract money from your corporation tax-free.
The Canada Revenue Agency (CRA) allows a corporation to pay a tax-free automobile allowance to the owner of the vehicle at a rate of 52 cents for each KM driven for the first 5,000 KM and 46 cents thereafter. The amount paid must be based on KM’s driven for business use.
In addition to being tax-free to the recipient, the automobile allowance is tax-deductible to the corporation.
About the Author
Allan Madan is a Chartered Accountant in Mississauga and Toronto helping individuals and business owners with tax and accounting matters.
I will just add that income splitting is also an option, though it is partially covered by the categories you listed (dividend, salary…etc.)
I’m still looking into this but I believe if the corporation sets up an employee profit sharing plan, the employer is able to pay the employee earnings and is not required to pay CPP or EI for the ER side. Also, if the profit sharing plan is set up for RRSP purposes then the distributions that come out of it is also tax free to the employee.
@Belinda,
A group RRSP profit sharing plan is a DPSP (deferred profit sharing plan) and is not subject to CPP or EI premiums.
Can these 7 methods be used in combination or must one be “topped-up” before the other.
E.g. Do you have to pay dividends up to 100% of net income BEFORE repaying any amount of a loan payable to shareholder or return of capital or you can mix it up?
Alex,
You can do them in any order. Although, the company may be obligated to pay debts before dividends.
One thing owners of corporations should consider is the mix between salary and dividends. The dividend tax credit does provide a relatively generous tax advantage and can reduce personal taxes to very low rate up to around $40,000.
Paying yourself all dividends can cripple you in the long term: Dividends are not earned income and
a) Cannot be used to generate RRSP contribution room and will reduce your ability to use an Individual Pension Plan in the future.
b) Do not allow you to make a Canada Pension Plan contribution and may reduce your future CPP benefit. I would normally suggest paying a salary up to the current CPP limit at the very least.
c) If you have child care expenses, you will not be able to deduct them against the dividend income.
The right salary dividend mix can be calculated by an experiences professional. Contact me directly if you are looking for such a calculation.
1) Sale of a personally owned life insurance policy to the corporation. Depending on the individual circumstances, there could be a value paid by the corporation to the shareholder tax-free, in excess of the cash value of the insurance policy. The details are complex and take into account the definition of “value” in subsection 148(9) and the disposition rules in section 148 and subsection 148.
2) IPP – Individual Pension Plans – allows for tax deductible contributions to a defined benefit plan from the corporation. Also can provide lump sum tax deductible contribution room at retirement, and potential top-up deposits depending on plan performance.
3) most life insurance proceeds paid through the Capital Dividend Account on death – tax free to estate.
Would it be possible to have a lease agreement with your corporation for your principal house; where no revenue is collected in exchange the corporation is to pay for all utilities, repairs and maintenance. The corporation has the entire house to run its affairs, ie meeting rooms, business ops, kitchen, yard as enjoyment, sleeping and live-in quarters for directors and meals provided? Or does that seem too aggressive for the CRA
The use of the home would be a taxable employment or shareholder benefit. The fair market value of the rent on the property would be the benefit. Any deductions may be denied unless it could be proven that the expenses were used for the purpose of gaining and producing business income.
Here’s a problem I was told was difficult to solve. Your are a NON-employee director of a small business corporation and the corporation uses the car for business which you bill at the $0.53/km rate , however since you are not an employee you can’t deduct this on your T1 so do you have to declare it as income to yourself and a deduction to your corporation? Doesn’t seem there is a way around this and you want the car to be in your name as you only use it say 15% for business.
Here’s a problem I was told was difficult to solve. Your are a NON-employee director of a small business corporation and the corporation uses the car for business which you bill at the $0.53/km rate , however since you are not an employee you can’t deduct this on your T1 so do you have to declare it as income to yourself and a deduction to your corporation? Doesn’t seem there is a way around this and you want the car to be in your name as you only use it say 15% for business.
I have to assume that you are also a shareholder of the corporation who is also acting as a director. You use your personal vehicle for company business in your role as director and the company reimburses you for your mileage at a rate of $0.53/km.
Any payments made to you as a shareholder would be either a dividend or a shareholder benefit. I am not certain the deemed dividend rules apply in this case and am leaning towards the shareholder benefit rules applying in this case.
A shareholder benefit arises when a benefit is conferred on a shareholder and the value of the benefit is included in their income for tax purposes. Therefore, I would suggest that the $0.53/km is a benefit conferred because it exceeds the maximum limit of $0.52/km.
I might suggest that you reduce the per kilometre rate to below the taxable benefit threshold (and pay back any excess to the corporation for 2010) and effectively avoid the whole issue. The only issue that would arise would be whether the kilometres claimed can be substianted.
Are you saying that the company can deduct the business automobile expense up to the limit, say $0.52km and the individual shareholder would not have to declare this as income because it could be covered by say a dividend from the company to the individual or a repayment of a shareholder loan, etc..(however if neither of these 2 methods were used, the shareholder would have to declare this as income? if so is it ‘other income’ since it’s not employment income?) Thanks
Yes. The company pays the person for mileage. The payment is a deduction (i.e. debit “Automobile Expenses”) for the corporation and is a non-taxable payment to the recipient.
The maximum tax-free deduction (0.52) has to be proportional to the costs of maintaining/owning the vehicle by the shareholder or is 100% a function of business kilometers driven, even if it is out of proportion – say $1000 to the shareholder against 3000 km of business kilometers driven. Say the vehicle is owned outright so the cost is just insurance and gas.
I have $200000. into my shareholder account and am turning 65 Was wondering how I get my money out without being taxed on it.
Hello Linda,
What do you mean by shareholder account? Take a look at 7 Ways To Get Money Out of Your Corporation.
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