Ways of Extracting Funds The Corporation

When you operate through your corporation, you obviously have a question as to what is the most tax efficient way of taking out the money from your corporation.

This is most relevant in case if you own your private corporation since public corporations have different criteria of withdrawing the money from corporation and the owners have many times no personal interest in the corporation.

The several ways of taking out the money from your corporation is as follows:

1)      Reimbursement of Expenses from Corporation:

When you incur corporation expenses from your personal bank account, it goes without saying that you can take out the money without inviting any tax implication.

However, the care should be taken to withdraw the exact itemised amount of expenses.

2)      Withdrawing money from Corporation by way of Salaries/Management Fees:

 When you withdraw salary from your corporation, an appropriate payroll tax needs to be paid to Canada Revenue Agency (CRA) within the prescribed time limit.

Salary/wages paid by the corporation is tax deductible for your corporation and taxable in the hands of the recipient of salary/wages.

The payroll tax calculation can be done by putting in the Gross Salary figure in Payroll Deduction Online Calculator (PDOC). Payroll tax needs to be paid on or before 15 th of the next month from the end of the month in which such salary or wages are paid out.

3)      Withdrawing money from Corporation by way of Dividend:

Dividend can be withdrawn from your corporation by withdrawing the money from your corporation without paying any payroll taxes. This is the simplest way of taking out the money from the corporation.

When you take out the dividend from your corporation, it is not tax deductible for corporation but taxable for the recipient. However, dividend is taxable on the concessional basis since it was not deducted by the corporation.

Of course, we need to file the salary and dividend slip and summary on or before February end of each year.

Whether to withdraw the money from your corporation by way of salary or by way of dividend would depend on couple of factors whether you want to create Registered Retirement Savings Plan (RRSP) and you believe investing in RRSP, whether you want to buy home and qualify as First Time Home Buyer, whether you have child care expenses that you want to deduct on your income tax return etc.

4)      Interest On Loan to Corporation:

When you lend the money to your corporation, you may want to change the interest to the corporation at the market rate. The interest paid by the corporation will be tax deductible for your corporation and will be taxable on the recipient tax return.

5)      Capital Dividend Payment:

When you sell your corporation asset. There will be capital gains tax liability on the excess of the selling price (or Market Value) over its cost.50% of the capital gains can be withdrawn absolutely tax free from your corporation.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.