Let’s assume you are doing good, and your business is profitable. At some point of time you will need to draw cash out of your private corporation. Some small business owners believe they can take cash out of their corporate bank account at any time. This is a big and potentially costly mistake. Corporation is a separate legal entity, and even if you are the only “owner” you cannot assume that the money in a corporate account is yours. Because it is not. “But what the heck, I earned it!” Yes you did. And still…it’s corporate money. But of course there are some legal ways to get that cash out.
In case you regularly need some cash for paying you living expenses, consider paying yourself a salary. How much? According to CRA, your remuneration should be reasonable. If you are the key person in your business that reasonability test is much less critical, and in most cases you can pay yourself as much as you want.
Payments to family members could be more tricky. Two main conditions should be met:
– The amount of the salary should be reasonable;
– A family member should actually work in the business and provide some services to the company.
You will find more details on this issue in our article Rules for Hiring Family Members.
So we would advise the business owner to set up a salary payment plan at the beginning of each calendar year based on his cash requirements. The salary is deductible to the corporation and taxable in the hands of the owner/shareholder.
A profitable corporation may accrue and record a year-end bonus payable to the owner/shareholder. This bonus will reduce the corporation’s taxable income but some requirements must be met in order for the bonus to be deductible to the corporation:
– The amount should be reasonable;
– There should be a legal obligation of the corporation to pay the bonus;
– The bonus must be paid within 179 days of the corporation’s fiscal year-end of which it was accrued. The corporation must prove that the bonus has effectively been paid to the shareholder, and the required source deductions on that bonus have been remitted to the CRA within the prescribed period.
Director fees could be paid to a director of your corporation, as simple as that. Note that a family member can be a director of your company without necessarily being a shareholder. The only requirement is that the family member must perform some services as a corporate director:
– Attend a meeting of the directors;
– Approve corporate minutes and resolutions;
– Sign applicable documents.
Of course, director fees must be reasonable based on the duties performed and time spent. Those fees are deductible to the corporation and taxable to the individual. Tax withholdings are applied as usually.
Unlike all the above payments, dividends are not deductible from the income of a corporation for tax purposes as dividend is not an expense. Dividends are distributed to shareholders from the retained earnings of your company after the corporate taxes were paid.
There is no “reasonability” test associated with payment of dividends. It does NOT matter whether the particular shareholder is actively engaged in your business. In many cases it provides a good opportunity of income-splitting with other adult family members (note that paying dividends to minors is a very bad idea).
Where the owners/shareholders invested money into their corporations, they can take it out tax-free at any time. The shareholder loan account reflects the amount of money that a corporation owes to its shareholders. Beware of the so-called “debit” balance in that account, which normally means that shareholders drew some cash out of their company without paying income tax. You should try to avoid this situation on the company balance sheet, as it is clearly a “red flag” for the CRA.
You can always CONTACT US to discuss your particular situation.