Tax-efficient ways to withdraw money from your business | Sponsored by BDO’s Scott Conner

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Simply withdrawing cash from your business’ bank account will likely result in a significant tax bill. So the question then becomes: how do you take money out of your business in a tax-efficient manner?

Remunerate yourself and family members

If family members work in the business, a reasonable salary (or wages) can be paid to them.  This is especially beneficial if family members have little or no other sources of income.  

Pay a taxable dividend

Dividends can be used to distribute money from the corporation to both you and your family members. It will be critical to consider both the tax on split income (TOSI) rules and the corporate attribution rules before any distribution is made.

Optimize your salary versus dividend mix

It is common for owner-managers (of Canadian-controlled private corporations) to pay themselves a combination of both salary and dividends.  Various factors can influence the owner and increase the complexity of the issue.

• Drawing dividends alone will not provide you with earned income for purposes of your RRSP contribution. 
• On the corporate side, you will want to consider the impact of any relevant payroll taxes, as well as any remittance requirements and filing obligations that may arise.
• Lastly, your corporation’s ability to claim scientific research and experimental development credits may be impacted by remuneration decisions.

Convert “hard ACB” into cash

If you purchased your business from someone else, it is possible that the shares you acquired have “hard” adjusted cost base (ACB), which can become relevant when planning to withdraw cash from your business. Essentially, “hard ACB” is a tax term that represents the amount that you paid for the shares when you purchased them, and it can potentially be converted into cash (or debt that can be repaid later) using a holding company.

Repay that shareholder loan

To help finance the start-up or growth of your business, you may have loaned funds to your company in the form of a shareholder loan. Any amount that you receive in settlement of your shareholder loan will be a tax-free distribution, similar to a return of capital.

Pay a capital dividend

In simple terms, the capital dividend account (“CDA”) is a notional balance that most commonly represents the non-taxable portion of any capital gains that a private corporation has realized on the disposition of capital assets. A positive balance in a corporation’s CDA can be distributed to Canadian resident shareholders as a tax-free dividend.

Capital Gains Strip

This plan may be beneficial to individual shareholders who have a need for personal cash and have built up significant equity inside their corporation.  Rather than paying a large dividend or salary to the individual shareholder at tax rates in excess of 48%, this planning involves extracting surplus at the 26% capital gains tax rate.

Each option above can land you in complex rules so please consult your advisor before finalizing your plan. 

Scott Conner is an experienced tax practitioner and practical problem solver at BDO. As a partner specializing in Canadian income tax, Scott has particular specialties in private companies, planning for estates, trusts, and complex transactions. As personal tax season approaches, Scott and his team understand personal taxes are as individual as clients themselves. BDO works closely with their clients to understand their specific needs and adjust strategies accordingly. BDO partners and staff take a proactive, hands-on approach. They closely follow existing and proposed legislation to determine how it will affect individual financial goals, and provide ongoing guidance.

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