What Are The Tax Efficient Ways to Withdraw Money from Your Business?
As a business owner, you may have surplus cash accumulating in your corporation. Simply withdrawing cash from your business 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?
In this article, we will discuss various methods of withdrawing cash from your business as well as the tax issues and benefits that might apply with each method.
Compensation
Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This is especially beneficial if family members have little or no other sources of income. Generally speaking, a reasonable compensation in this instance would be one that approximates what would be paid to an unrelated third party for the same work activities.
Dividend
Dividends are the earnings a corporation retains after paying off taxes from their net profits. They are distributed to the shareholders of a company, thus the owner and other family members they may wish to pay must be shareholders of the corporation either directly or indirectly, even if they do not work for the business. It is taxed more efficiently than the salary as the tax rate depends upon the characteristic of the dividend.
Optimize your salary vs dividend mix
It is common for owner-managers (of Canadian-controlled private corporations) to pay themselves a combination of both salary and dividends but because of the various criteria involved, it can be a complicated option. You should discuss with your accountant to find if this is best fit for you needs.
Capital Dividend
In simple terms, the CDA is a notional balance that most commonly represents the non-taxable (currently 50%) portion of any capital gains (or similar receipts) that a private corporation has realized on the disposition of capital assets (tangible and intangible).
Directors’ Loans
A director’s loan is another efficient way to take money out of a company, although it can be fraught with hazards if the process is not handled correctly. If you take money out of a business and it is not a salary or a dividend, you have what is known as a director’s loan. However, if you receive any amount as interest for the loan, it may be included in your taxable income as investment income.
Conclusion
Whether you find yourself in a situation where taking out some cash from your business is a question of necessity or whether this is an issue that has arisen as a matter of course, taking the time to properly plan how you’re going to withdraw money from your business will ensure that you’ll pay the minimum amount of tax necessary.
If you’re interested in discussing these or other possible ways to withdraw cash from a closely held corporation, contact us. We can help you identify the optimal approach at the lowest tax cost.
In this article, we will discuss various methods of withdrawing cash from your business as well as the tax issues and benefits that might apply with each method.
Compensation
Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This is especially beneficial if family members have little or no other sources of income. Generally speaking, a reasonable compensation in this instance would be one that approximates what would be paid to an unrelated third party for the same work activities.
Dividend
Dividends are the earnings a corporation retains after paying off taxes from their net profits. They are distributed to the shareholders of a company, thus the owner and other family members they may wish to pay must be shareholders of the corporation either directly or indirectly, even if they do not work for the business. It is taxed more efficiently than the salary as the tax rate depends upon the characteristic of the dividend.
Optimize your salary vs dividend mix
It is common for owner-managers (of Canadian-controlled private corporations) to pay themselves a combination of both salary and dividends but because of the various criteria involved, it can be a complicated option. You should discuss with your accountant to find if this is best fit for you needs.
Capital Dividend
In simple terms, the CDA is a notional balance that most commonly represents the non-taxable (currently 50%) portion of any capital gains (or similar receipts) that a private corporation has realized on the disposition of capital assets (tangible and intangible).
Directors’ Loans
A director’s loan is another efficient way to take money out of a company, although it can be fraught with hazards if the process is not handled correctly. If you take money out of a business and it is not a salary or a dividend, you have what is known as a director’s loan. However, if you receive any amount as interest for the loan, it may be included in your taxable income as investment income.
Conclusion
Whether you find yourself in a situation where taking out some cash from your business is a question of necessity or whether this is an issue that has arisen as a matter of course, taking the time to properly plan how you’re going to withdraw money from your business will ensure that you’ll pay the minimum amount of tax necessary.
If you’re interested in discussing these or other possible ways to withdraw cash from a closely held corporation, contact us. We can help you identify the optimal approach at the lowest tax cost.