Here’s how to withdraw money from your corporation in Canada that won’t have you paying the tax man more than necessary.
Whatever the reason you may have for it, simply withdrawing cash from your business’s 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? Here are some strategic ways to withdraw money from your corporation without incurring hefty tax liabilities.
1. Salary and Bonuses
Paying yourself a salary or bonuses is a common method, but it’s essential to strike a balance to optimize tax benefits.
Tips:
- Ensure the salary is reasonable for the work performed.
- Bonuses can be timed to match lower-income years for tax efficiency.
2. Dividends
Dividends are another popular method for withdrawing funds, often resulting in lower tax rates compared to salary.
Tips:
- Understand the difference between eligible and non-eligible dividends.
- Plan dividend payments to minimize personal tax liability.
3. Shareholder Loans
You can borrow money from your corporation as a shareholder loan, but this strategy comes with specific conditions and must be carefully managed.
Tips:
- Ensure the loan is repaid within the fiscal year to avoid it being deemed as income.
- Use the loan for short-term cash needs and repay promptly.
4. Capital Gains
If structured correctly, you can sell shares of your corporation and benefit from the capital gains exemption.
Tips:
- Ensure your corporation qualifies as a Qualified Small Business Corporation (QSBC).
- Consult with a tax professional to plan the timing and structure of the sale.
5. Management Fees
Charging management fees for services provided by you or another company you own can be a way to withdraw funds.
Tips:
- Fees must be reasonable and justifiable.
- Maintain proper documentation to support the management services provided.
6. Reimbursements
You can get reimbursed for expenses incurred on behalf of the corporation. This method is tax-free if documented correctly.
Tips:
- Keep detailed records and receipts.
- Ensure the expenses are legitimate business expenses.
7. Pensions and Retirement Plans
Contributing to a pension plan or retirement savings plan provides a tax-deferred way to withdraw funds in the future.
Tips:
- Set up an Individual Pension Plan (IPP) or Registered Retirement Savings Plan (RRSP).
- Make regular contributions to benefit from tax deferrals.
8. Health and Welfare Trusts
Using a Health and Welfare Trust (HWT) to cover medical expenses can be a tax-efficient method of withdrawing money.
Tips:
- Set up an HWT to pay for health-related expenses.
- Ensure the trust is properly administered to comply with tax laws.
9. Partner with Expert Accountants
Navigating the complexities of tax-efficient withdrawals requires expertise. Partnering with expert accountants can help you maximize your benefits while staying compliant with tax regulations.
Tips:
- Consult with accountants who specialize in corporate tax planning.
- Regularly review your withdrawal strategy with your accountant to adapt to changing tax laws and business needs.
Withdrawing money from your corporation requires careful planning to minimize tax liabilities. Whether you choose to take a salary, dividends, shareholder loans, or any other method, understanding the tax implications is crucial. Partnering with expert accountants can help you navigate these strategies effectively, ensuring you keep more of your hard-earned money.
Contact IDM today for tailored business advice and comprehensive tax planning services. Let us help you withdraw money from your corporation in the most tax-efficient manner possible.
