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.

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{ 53 comments }

Allan January 28, 2010 at 10:40 pm

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.

Tax Guy January 28, 2010 at 11:09 pm

@Allan – Good one. Thanks

Allan Madan January 30, 2010 at 5:03 am

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.

Sam February 8, 2010 at 11:51 pm

I will just add that income splitting is also an option, though it is partially covered by the categories you listed (dividend, salary…etc.)

belinda March 22, 2010 at 7:01 pm

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.

Tax Guy March 23, 2010 at 9:22 pm

@Belinda,
A group RRSP profit sharing plan is a DPSP (deferred profit sharing plan) and is not subject to CPP or EI premiums.

Alex July 4, 2010 at 4:19 pm

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?

Tax Guy July 5, 2010 at 4:00 pm

Alex,
You can do them in any order. Although, the company may be obligated to pay debts before dividends.

Paley Business Consulting Services July 22, 2010 at 11:57 am

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.

Darren Hanser July 28, 2010 at 8:53 am

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.

Winner November 24, 2010 at 12:06 am

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

Tax Guy November 24, 2010 at 11:24 am

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.

Alex November 24, 2010 at 11:30 am

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.

Tax Guy November 25, 2010 at 10:34 am

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.

Alex December 13, 2010 at 12:22 am

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

Tax Guy December 13, 2010 at 10:57 am

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.

Alex December 13, 2010 at 11:04 am

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.

Linda January 7, 2011 at 9:28 am

I have $200000. into my shareholder account and am turning 65 Was wondering how I get my money out without being taxed on it.

Tax Guy January 7, 2011 at 12:27 pm

Hello Linda,
What do you mean by shareholder account? Take a look at 7 Ways To Get Money Out of Your Corporation.

Linda January 7, 2011 at 4:39 pm

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??

Tax Guy January 7, 2011 at 5:10 pm

@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.

Linda January 7, 2011 at 5:20 pm

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.

Tax Guy January 7, 2011 at 6:03 pm

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.

Rhonda January 8, 2011 at 9:58 am

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?

Tax Guy January 10, 2011 at 9:19 am

@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.

Curious February 4, 2011 at 6:42 pm

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?

Tax Guy February 7, 2011 at 7:52 am

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.

Evan February 9, 2011 at 1:54 am

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?

Tax Guy February 9, 2011 at 8:47 am

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.

Evan February 15, 2011 at 11:32 am

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.

Tax Guy February 16, 2011 at 4:28 pm

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.

Evan February 16, 2011 at 10:51 pm

Thanks Tax Guy- just wanted to make sure it was okay to invoice my corp from my sole proprietorship – will look into dividends further.

Linda February 9, 2011 at 9:51 am

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?

Tax Guy February 9, 2011 at 4:08 pm

Linda,
These are most likely maintenance items and an expense.

Linda February 9, 2011 at 11:19 am

medical expenses is .52 per km for travel and 3 X $17.00 for meals for out of town appontments.
Is this coreect??

Tax Guy February 9, 2011 at 4:11 pm

I would refer either to CRA document T4044 (Employment Expenses) or T4103 Employers guide to taxable benefits.

Linda February 16, 2011 at 9:14 am

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

Tax Guy February 17, 2011 at 4:12 pm

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%.

Linda February 18, 2011 at 2:15 pm

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??

Tax Guy February 18, 2011 at 3:26 pm

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.

Linda February 18, 2011 at 9:08 pm

My warning sign says to claim a eligible dependant?
Married couple with 3 dependents and both have income around $50000.00 each???

Tax Guy February 19, 2011 at 11:26 am

Hello Linda,
I don’t understand your question or how it related to drawing funds from a corporation.

ASIF February 25, 2012 at 6:35 pm

I DRAW MONEY FROM THE CORPORATION AS A CASH (SOME TIME ONLINE PAYMENTS, MONEY TRANSFER, PERSONAL EXPENSES ETC SINCE WRITING A CHEQUE COST ME $2.00 PER CHEQUE) SHOULD I REALY WRITE A CHEQUE FOR MYSELF OR JUST ISSUE A T4 SILP FOR MY SELF FOR TOTAL AMOUNT I SPENT WITHOUT WRITING A CHEQUE.

Tax Guy February 27, 2012 at 10:25 pm

Asif,
You can issue a T4 for the payments or a T5 if you need to issue them as dividends.

Frank February 27, 2012 at 6:17 pm

My small corp is inactive. I will be winding it down next tax year. There Is about $20,000 in retained earnings. Can I just write myself a cheque and then turn around and put it in my personal rrsp (to offset personal tax hit). ? Or is this a bad idea? Would this still require a t5/t4?

Tax Guy February 27, 2012 at 10:39 pm

The payment would require a tax slip and putting it into your RRSP would offset the personal tax provided you have RRSP room. Whether its efficient is a different matter. You might be able to extract some of the money tax-free.

JC October 20, 2012 at 2:56 pm

Thank you for the article, I am in the process of licensing a product invention to a company. I am the sole owner of the patent. I have read that making a corporation could be convenient, is that right? if I do so what is the most convenient method to extract funds from the corporation for my personal use?, taking into account that the potential income from licensing is not predictable and can be irregular.

Tax Guy - Burlington Accountant October 22, 2012 at 9:16 am

If you already have personal income over $45,000 and you want to draw everything out, then a corporation will not provide any savings. If you want to leave the funds in and draw out later (i.e. more than a year), then you have a deferral.

Using Ontario as an example, the corporate rate on income is 15.5% and the top personal rate on dividends is 32.57%. Combined this is 48% whereas the personal rate on the income would have been 46%.

Dividends would be the best way to draw from a corporation.

Tanner Delorey December 24, 2012 at 4:19 am

I have written myself some cheques directly from my company account over the last couple months to pay off some personal debt. I was hoping clarification on how much dividends I’m allowed to pay myself and frequency? Can I switch to say salary any time with out raising red flags with tax Canada? Is there a tax rate to the dividends I have issued? Looking for some guidance.

Thanks

Tax Guy - Burlington Accountant December 24, 2012 at 9:07 am

Salaries are tax deductible to the company whereas dividends are not. You can allocate amounts to dividends provided the company has the after tax cash available.

Tanner Delorey December 24, 2012 at 4:21 am

Not worried about personal tax right now just my corporate tax right now.

Tax Guy - Burlington Accountant December 24, 2012 at 9:08 am

Corporate and personal taxes are combined. I suggest considering both.

Tax Guy December 13, 2010 at 11:22 am

Alex,

You are over thinking this.

If you used your personal car for business and drove, say 500km. The company can pay you $0.52/km tax-free. The company deducts $260 as an expense and you claim nothing: No dividends, no salary, no anything.

The proportional allocation only comes into play when you are claiming the actual automobile expenses “personally.”

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