You’ve worked hard to set up your business and turn a profit, and it’s likely that for the first few years, you sacrificed your personal needs so that you could put any profits made, right back into your business to promote its growth. But now that your business is generating more revenue, you might wish to takes some cash out for your personal use, which of course, you are perfectly entitled to do. However, when it comes to your taxes, it’s not quite as simple as just taking cash out from your business, no matter what you want to use it for.
As any trusted tax accountant in Surrey will tell you, how you withdraw funds from your business can have a significant impact on your tax bill, and unfortunately, there is no one-size-fits-all rule. A number of factors can influence how much tax you pay on a cash withdrawal from your business, and listed below are just a few of the most popular methods of cash withdrawals from businesses:
Salaries and bonuses
Renumerating yourself or any members of your family working for you, is one way to withdraw cash from your business. In doing so, you can add your withdrawal as salary expense for the company, which excludes it from the businesses tax, and includes it in personal income tax. But, the salary or bonus that the company owner of family member sets for themselves, must be similar to that of an employee who isn’t a family member, carrying out the same work.
Higher renumeration, or even bonuses, may be set for them as what they carry out is more specialist and skilled, and the amount paid by a private corporation that’s Canadian-controlled to an owner who’s resident and actively engages with their companies’ operations, wouldn’t be questioned by the CRS.
Taxable dividends
These are the earnings retained by a company once they’ve paid off their taxes from any net profits, and are distributed to shareholders. This is another method of withdrawing cash from your company, and means that the owner of your business and any family members who wish to be paid, must also be direct or indirect shareholders of the company, even if they don’t work for it.
With the tax rate depending on the dividends characteristics, dividends are taxed in a more efficient manner than salary, but can lead to reduced Old Age Security Benefits due to the dividend gross-up mechanism. For this to be a method of cash withdrawal that’s tax efficient, both the rules surrounding tax on split income and corporate attribution rules, must be carefully considered.
Capital dividend
A capital dividend may be paid to business owners or managers, and is also referred to as a return of capital. A payment made to the shareholders of a company, it usually comes from a shareholder’s equity or a Capital Dividend Account that has a positive balance. Net capital gains are usually the source of a positive balance, and to avoid capital losses, as soon as capital gains are incurred, the business owner must pay a capital dividend.
Repaying loans from shareholders
Money is sometimes loaned to businesses from the company owner by way of a shareholder loan, and for a business turning a profit, repaying that loan might be a sensible idea as it will be classed as a tax-free distribution. Note however, that any interest received from the loan may become an investment income for tax purposes, and be included in your taxable income.
Working with services providing professional corporate tax planning is the best way to accurately assess the tax implications of withdrawing cash from your business, particularly as no two businesses are the same.