Withdrawing Money From Your Business -Tax Efficient Ways to do it.

A frequent topic that comes up from our business clients is how to withdraw money from their business in a tax efficient manner.  We’ve compiled some of our advice to them, and would like to share it with other business owners out there.  

Pay Yourself and Family Members

As a business starting out, many owners find that all the money they make is reinvested into the business.  This is usually done for good reasons:

• To keep the business afloat
• To achieve a measure of stability and profitability in the business

Once your business has achieved stability and profitability, you should start to remunerate yourself for your efforts, by way of a regular salary.  You also have the opportunity to pay family members, and you should take advantage of it.

In most instances, a business owner will pay themselves at an amount similar to what a third party would be paid for a similar position, such as general manager.  Any family members working for you should also be paid a salary commensurate with what is normal for the specific type of work being done.  The tax advantages here are that, while you and your family members on salary still have to pay taxes on the amounts earned, the corporation can take a deduction on those salaries.  Please note that the salaries you pay family members must be considered “reasonable” by the Canada Revenue Agency (CRA) or they may question the amounts you submit.  They give more flexibility to those considered Owner-Managers of a business, in terms of what they consider reasonable salary payment.

Paying Bonuses for Owner Managers

Similarly, the CRA tends to give more flexibility to Owner-Managers when it comes to paying out bonuses, over and above salary.  This applies so long as the Owner-Manager is a Canadian resident, and is active in the day-to-day operation of the business entity, referred to as a Canadian-Controlled Private Corporation (CCPC).

Paying Out Taxable Dividends

There may be some opportunity to minimize the taxes you pay on dividends to yourself and family members.  In order to do this, you and any other family members such as spouse or children would have to become shareholders in the corporation.  Additionally, you would and/or your accountant would need to carefully examine the Tax On Split Income (TOSI) rules, as well as rules pertaining to Corporate Attribution.  The rules surrounding income splitting can get complex; your account should be able to help with the calculations and regulation of this type of action.

Outstanding Shareholder Loan Repayment

If you have loaned money to your company – in the form of a shareholder loan – and your corporation has become profitable, you might consider having your company repay some or all of that loan.  The amount your corporation gives back to you is considered a tax-free distribution – like a return of capital.

Receive Interest on Your Shareholder Loan

Another strategy would be to have your company begin to pay you interest on the shareholder loan you have given it.  The interest the company repays you would be deductible for the corporation at tax time; you however, would need to report the payments, and pay taxes on them, as investment income.

Other Strategies When Withdrawing Money from Your Business

We’ve listed a few of the most common ways business owners can withdraw money from the business with an eye toward minimizing the tax payable.  Other ways to distribute company funds include:

Paying a capital dividend.  There are ways to do this tax-free, although your accounting firm would need to determine the status of your corporate capital dividend account. These calculations can get somewhat complex, but they are an opportunity for saving on your taxes.

Converting “hard” adjusted cost base (ACB).  This applies to when you have purchased your business from another individual or party; hard ACB refers to how much you paid for shares when you bought them – these can be converted into cash using a holding company – accessing this capital you originally invested can be done tax-free.  Again, your accountant will be able to advise if this applies to  your situation.

We hope you have found this summary useful and informative.  We are here to help with all your tax-related and accounting needs.  Please contact us.

AMACC

Mahdi Songhori, MAcc