Navigating Fund Extraction from Your Canadian Corporation

For Canadian business owners, withdrawing funds from their corporation to meet personal financial goals is a nuanced process. Unlike simple bank withdrawals, this involves various methods, each with its own tax implications and benefits. In this discussion, we explore common ways to extract funds from your corporation, providing a comparative analysis.

Remuneration or Performance Incentives

One straightforward method is designating remuneration through salaries or bonuses. This approach makes you an employee of your business, ensuring regular or occasional payments for services. Family members involved in the business can also receive compensation if it aligns with industry standards.

Pros:

• Reduces taxable income at the corporate level.
• Creates RRSP contribution room for you and eligible family members.
• Eligibility for government benefits like CPP/QPP, EI, and OAS.

Cons:

• Full taxation at your individual marginal tax rate.
• Payroll taxes like CPP/QPP and EI reduce net income.
• Risk of tax on split income (TOSI) if unrelated family members receive payments.

Dividend Disbursement

Distributing dividends is another common tactic. As a shareholder, you receive a portion of corporate earnings, which can extend to family members holding shares.

Pros:

• More favorable taxation compared to salaries or bonuses.
• Dividend tax credits reduce the applicable tax rate.
• Exempt from payroll taxes, enhancing net income.

Cons:

• Does not reduce corporate taxable income.
• No RRSP contribution room created.
• TOSI rules may apply if dividends go to non-contributing family members.

Capital Dividends

Capital dividends are tax-exempt disbursements from the capital dividend account (CDA) of your corporation. They are fully tax-exempt at the individual level.

Pros:

• Completely tax-exempt at the individual level.
• No payroll taxes, maximizing net income.

Cons:

• Administrative requirements and CDA balance maintenance are essential.
• Penalties and interest for non-compliance.

Shareholder Loan Mechanism

This method involves obtaining or providing loans between you and your corporation. Loans repaid within a year after the taxation year of disbursement are not taxable.

Pros:

• Loans repaid within the specified timeframe are not taxable.
• No mandatory interest payments unless contractually obliged.

Cons:

• Can become a taxable benefit or dividend if not handled correctly.
• Borrowed funds used for personal acquisitions may be considered taxable benefits.
• Failure to repay within the timeframe could result in taxable dividends.

In conclusion, the choice of fund extraction method from your Canadian corporation depends on various factors, including income levels, cash flow needs, retirement plans, family dynamics, and corporate structure. Seeking advice from professional accountants or tax advisors is crucial for making informed decisions about fund withdrawal strategies.