# Pulling Money Out of a Corporation: Yes or No



## eulogy (Oct 29, 2011)

I have my regular working income, which has me well into the 32% tax bracket in Alberta. I also have a side income that goes into a corporation. And I'm sort of unsure whether I'm really getting all that far ahead by leaving it in the corporation for a time when I'm not working (maybe in a year or two).

Being a small business I'll pay a taxation rate of 15% on the income earned, though if I pay it out to me or a portion of it, I don't have to pay corporate taxes on it (obviously paying personal taxes on it). Even though I'll have a period of one year of not working, it will be staggered halfway through each year. So technically I'll be earning an income during the first half of the year and in the next year I'll be working the second half, so that eliminates my ability to pull out like $17,000 and pay very minimal taxes on it (around $930).

I'm just looking for some opinions on this. I'm just wondering whether I should pull the money out, eat the tax and be done with it? Or whether leaving it in there for a more opportune time is better? Maybe even dividends, though I have to pay the 15% tax right away, plus the dividend tax.

Technically this year I should be able to pull out around $7-8k because that should be what I've contributed to my RRSP after tax.

Any opinions, thoughts, questions, please share.


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## sharbit (Apr 26, 2012)

It depends if your employment income plus dividends from your corporation times 1.25 will be below 42707 in those two years (the lowest bracket). if so then you have the right idea and you'll get about 7% savings.


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## eulogy (Oct 29, 2011)

In those years I'll will most likely be well below the 42k mark.

I was thinking about this more. The money I'd take out I'd most likely dump into my RRSP, so that really wouldn't cause a tax burden.


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## Homerhomer (Oct 18, 2010)

You could pull out the money in the year when your income is lower, park it in TFSA if you have a room or in a savings account, contribute into rrsp in the following year when you are in the higher tax bracket. You will owe the tax in the current year but you will get back more next year.


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## eulogy (Oct 29, 2011)

Well let's say that my time off didn't happen... would it be in the best advantage to take the money out and put it in an RRSP? As this would be a zero tax move.


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## sharbit (Apr 26, 2012)

The rrsp room will always be there though; if your wage increases in the future it might be beneficial to have some ready.


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## eulogy (Oct 29, 2011)

I understand the rule, but in Alberta the next tax bracket is 36% at mid 80k. Top bracket of 39% after $130k. I'll eventually break into the 36% bracket, but no guarantee on the next bracket. I think Alberta goes under a different category compared to say like Ontario.


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## donald (Apr 18, 2011)

I'm not accountant!!!FAR FROM IT(trying to learn,or better phrased understand my acct(who,lucky me is a family member,)anyways you can have a investment acct set-up inside a canadian corp and buy the regular products ie:the safe sh&t-money market ect(don't think you would want to play riskier assets classes.

I have had a money market fund inside my corp for a few yrs now,(i don't need it for operations and can quickly sell my units if i do)

I don't speak like the numbers people here but i hope i make sense-only thing you have to report is the earned income from interest(which you submit in your personal taxes,i think?) on your corp invest-It's shelter and away from being taxed!You can go that route....Moneygal or any of the other accts here would likely explian it better than me.I think by the sounds of your question this might help.-Buy income earning investments in your corp-don't take it out if you don't want/need/shuffle through taxes and into your personal "space".


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## Homerhomer (Oct 18, 2010)

donald said:


> I'm not accountant!!!FAR FROM IT(trying to learn,or better phrased understand my acct(who,lucky me is a family member,)anyways you can have a investment acct set-up inside a canadian corp and buy the regular products ie:the safe sh&t-money market ect(don't think you would want to play riskier assets classes.
> 
> I have had a money market fund inside my corp for a few yrs now,(i don't need it for operations and can quickly sell my units if i do)
> 
> I don't speak like the numbers people here but i hope i make sense-only thing you have to report is the earned income from interest(which you submit in your personal taxes,i think?) on your corp invest-It's shelter and away from being taxed!You can go that route....Moneygal or any of the other accts here would likely explian it better than me.I think by the sounds of your question this might help.-Buy income earning investments in your corp-don't take it out if you don't want/need/shuffle through taxes and into your personal "space".


Just keep in mind that your investments kept inside the corporation are treated as inactive income and are taxed at a higher rate and do not qualify for the small business tax break, with that said in many cases it makes sense, however for OP he wants to invest the money inside RRSP, which is the only zero tax otion available. He will reduce the corporate tax by drawing management fee or wages, and then offset the increase in personal tax by putting it into rrsp, he will only be taxed when he withdraws from rrsp. In your scenario you pay the corporate tax on profit (CCPC rate), invest after tax profit inside the corporation and pay tax on any investment income (high rate) each year.


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## atrp2biz (Sep 22, 2010)

Yes, the inactive income is taxed at the general tax rate, but as a result, it would be distributed as eligible dividends.


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## FrugalTrader (Oct 13, 2008)

For us, we dividend out enough from the corp so that there is close to $0 personal tax owning at the end of the tax year. The more personal tax deductions you have (ie. childcare, rrsp's, investment loan, charity), the more we withdraw from the corp.


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## donald (Apr 18, 2011)

Homerhomer(forgive the regular joe talk,just curious on the inactive $)Even if a money market fund is paying say 40/50 dollars a mth from the interest say on 50k(ie:the money is *still ?* working(is'nt that the case?)What is the definition of-inactive?.(how does inactive $ differ from active?)

I only ask because:I wanted a portion of the money inside the corp to atleast earn something(and as far as i know there is nothing like a hisa(something with safe rates) you can use in a corp?,or is there?)i know my money market fund is weaker than the rates on a hisa-but one would be better served to keep excess in a corp and worry about tax later(when actually converting it to personal?)-I'm the same as frugal-I'm paid out in the most tax efficient way through dividends and a salary(which is lower,than i actually should take)Sorta looking at a corp as equal to a rrsp(ie:building $ in it)

What are some intelligent ways to use ''extra'' money inside a corp?Can one buy common dividend stocks inside a corp?can you mix the 2 together?ie:buy shares of td bank say?Sorry,not intending to hijack the theard.-what are some of the best avenues?


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## Homerhomer (Oct 18, 2010)

Donald, for majority of small businesses the inactive business income is generated from investments as oppose to the regular line of business, so in your case if you are in construction (if my memore serves me right) your profit for the first $500K is taxed at the lower rate (15.5% in ON). Now let's say you always have some money in your bank account to cover the expenses and the bank pays you a bit of interest, I would still consider it active income because everyone needs to have bank account, pay service charges, everyone needs cash to operate the business, and if bank pays you some interest then good for you.

Now on the other hand you have profit each year and you are not withdrawing it personally, the cash is sitting in the corporation and you invest it, that is inactive income which is taxed at the higher rate (that depends on what type of income, or if you are drawing dividends and so on).

Just like individually you pay different tax rate on interest, dividends, capital gains and so on, it is really no different inside the corporation so everything else being equal you want to use investment vehicle that is most tax friendly, you can buy shares of TD or any other company, real estate, bonds and on and on. Dividends and capital gains are more tax friendly than interest, so from the tax point of view you would want to avoid interest.

Often what happens is there is a holding corporation set up (in case your operating corporation is sued you don't want to loose your investments) for all your investments, and you deal with it over there. If your corporation earns dividend income from publicly traded company, if you don't pay it out in the same year in form of dividends, your corporation will pay what is called part 4 refundable tax which is refunded back to the corporation once the dividends are declared to the shareholders, so quite often the dividends are declared for the amount of dividends earned in the corporation in the same fiscal year.

That's in a nutshell without going into much details ;-)


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## donald (Apr 18, 2011)

-Tax point of view you would want to aviod interest-I did'nt know that!!Thank-you,homer!I guess i should look into that(does'nt sound like a money-market is right @ all for excess)

So if i bought say shares of td bank stock(i could'nt drip and re-invest?,i would have to take the quater divs every year)I did'nt think about the suing angle either(i built up a emergency fund over the last few yrs in my business and it is not in ''play")I often wonder what ''most'' small business owners do with left over profit(that is not needed)I know a few guy(in the construction industry)that always almost drian there company to the bare min-i'm thinking that is because of suing and being unprotected.Thanks again homer!I learned something today.


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## eulogy (Oct 29, 2011)

Thanks for the suggestions everyone. I thought about the idea of investing the money, but decided against it because it is taxed at a higher rate. I'm of the impression that I wouldn't end up further ahead (unless I made big returns).

I think Homer articulated the way I'm starting to look at it. If I take income out the year it is earned, I don't pay corporate taxes on it (0%). I'll take it as a director fee, or really whatever my accountant says is best, and dump it directly into my RRSP, which makes my personal tax obligation 0%.

I'm guessing that is the best option instead of filling up my RRSP on the personal side and letting the money sit in a corporate account doing nothing, and eventually suffering corporate taxes.


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## FrugalTrader (Oct 13, 2008)

@Eulogy, note that if you dividend out funds to deposit into your RRSP, you'll be able take more out of your corp than you need to contribute to your RRSP. This is due to the difference in the non eligible dividend tax rate, and the tax rate (refund) on your RRSP contribution. More information here:
http://www.milliondollarjourney.com...-pay-for-personal-tax-deductible-expenses.htm


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## eulogy (Oct 29, 2011)

I'll need to sit down and do the math on it. I know going the dividend route is an automatic 15% in corporate taxes. But I'll run the numbers.

Edit:

Interesting. So in Alberta, I'm marginally 32%, my dividend would be at 9.63%. 

So if I had $10,000 in RRSP space I wanted to fill, I could dividend out $33,200.

The corporation pays 15% on the income, so $4980 in taxes. I get $10,000 in an RRSP and $23,200 outside an RRSP.

4980/23200 = 21.5%.

Not to bad. It's a fair way of getting them out. If I only had 30k sitting in cash in the corp though lol.

Edit2:

Oh damn, realized it's non-eligible dividend rate, which is 18.96%. Now it doesn't seem to be worth it.


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## FrugalTrader (Oct 13, 2008)

If you are the only shareholder in the corp, the tax system is designed so that it's approximately equal whether you withdraw as salary or as dividend. However, I read in an article by Jamie Golembek that you'll save a couple of percentage points if you withdraw as a dividend. If you have a spouse with lower income, that's where you can really save tax.


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## Homerhomer (Oct 18, 2010)

FrugalTrader said:


> If you are the only shareholder in the corp, the tax system is designed so that it's approximately equal whether you withdraw as salary or as dividend. However, I read in an article by Jamie Golembek that you'll save a couple of percentage points if you withdraw as a dividend. If you have a spouse with lower income, that's where you can really save tax.


And even better if your children are over 18 and are shareholders (and don't have other income).

However one has to look at a whole picture including personal side of things (RRSP, child care, CPP and on and on and on) to determine the best way to withdraw, often it is a combination of wages/fees and dividends.


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## atrp2biz (Sep 22, 2010)

If you don't need the money right away, you would be better of investing within the corp rather than withdrawing and investing personally. You still get the benefit of tax deferral, especially if you're the buy and hold type (which my wife and I are). If we do have dividends or capital gains, we would take them out at that time otherwise there is no defferal benefit with Part IV taxes.


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## Homerhomer (Oct 18, 2010)

atrp2biz said:


> If you don't need the money right away, you would be better of investing within the corp rather than withdrawing and investing personally. You still get the benefit of tax deferral, especially if you're the buy and hold type (which my wife and I are). If we do have dividends or capital gains, we would take them out at that time otherwise there is no defferal benefit with Part IV taxes.


I agree, however one glove doesn't fit all, to withdraw and invest in a margin account wouldn't make sense, however inside a sheltered account it may.


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## FrugalTrader (Oct 13, 2008)

If you're a dividend investor, one thing to consider is to invest within a corp. The money is only taxed 15%, so you have a higher capital base to invest with. You can then flow through the eligible dividends to the shareholder and the corp will not owe any tax. The result is a greater income stream than if you were to withdraw the cash first and invest personally.


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## eulogy (Oct 29, 2011)

I did the math with the new dividend percentage and it works out to 36% tax, which is higher than my marginal rate.


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## atrp2biz (Sep 22, 2010)

Really? 

Did you take into consideration the CPP and employer's contribution to CPP?


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## atrp2biz (Sep 22, 2010)

In AB at the 32% marginal rate, the after tax amount in your pocket per dollar of gross income in the corporation by drawing salary is (excluding consideration for CPP)

1-.32 = 0.68

By taking it as dividends, the after tax amount in your pocket is

(1-.14) x (1-.1896) = 0.697

Am I missing something?

http://www.taxtips.ca/taxrates/ab.htm
http://www.taxtips.ca/smallbusiness/corporatetax/corptaxrates2012.htm


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## sharbit (Apr 26, 2012)

eulogy said:


> The corporation pays 15% on the income


The Alberta small business rate is 14% [38-10-17+3]. atrp2biz eluded to this.


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## Homerhomer (Oct 18, 2010)

atrp2biz said:


> In AB at the 32% marginal rate, the after tax amount in your pocket per dollar of gross income in the corporation by drawing salary is (excluding consideration for CPP)
> 
> 1-.32 = 0.68
> 
> ...


Not missing anything, the end result should be almost identical.


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## eulogy (Oct 29, 2011)

Sorry an error on the corporate tax rate.

I did the math like this.

If I have $10,000 in RRSP space, I can dividend out (.32/.1896)*10,000 = 16877

I put my $10,000 into my RRSP and I'm left with $6877 outside the RRSP

The corporation has to pay tax on dividends, so tax is 0.14*16877 = 2362.78.

So 2362.78/6877 = 34.5% (obviously lower because I was using the 15% corporate rate.

If I just took the money out as a directors fee (or something like that), I wouldn't pay corporate taxes on all of it. I wouldn't pay personal taxes on what I put into my RRSP. I'd be left with $6877 * 0.32 = $2200 in tax obligation.


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## FrugalTrader (Oct 13, 2008)

Is the directors fee considered a salary? If so, the company would need to withhold taxes (possibly match cpp) and remit to CRA. As well, when you deposit into your RRSP, you are _deferring _tax, so you'll have to bite the bullet and pay tax eventually.


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## Homerhomer (Oct 18, 2010)

He can charge consulting or managment fee and claim it as business income on his personal tax.


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## eulogy (Oct 29, 2011)

I can get the money out without the tax being withheld. I technically have to pay CPP on it (not EI), but my CPP/EI are both maxed out earlier in the year.

I realize that putting it in an RRSP is deferring the tax, but I'm okay with that since it should be deferred for probably a good 40 years. Honestly, I don't have anything else to do with the cash in the corporation. At the end of the day we're talking about literally a percent or two. I'm not making the big bucks to really make a big difference either way.

All I know is that there is a slight tax advantage taking the money out as income vs dividends for what I plan to use it for. And in my particular case I won't be paying CPP (don't have to pay EI). 

... but the other way to look it is that I plan on maxing out my RRSP anyway, so whether I put money from a corporation in the RRSP or leave it outside is irrelevant because I will have paid the 32% in taxes on other earnings. Maybe I need a "big picture" perspective looking at things over a few years. Maybe it's in my best interest to pull all corporate income out at the end of the year, pay my taxes (personal) once and be done with it. Instead of eating the 14% corporate tax, deferring my personal income tax on it and possibly end up in the position of taking it out at 32% (41.5%) or even a lower bracket like 25% (35.5%). Or the same equations at non-eligible dividend rates.

I guess I just need to crunch the numbers.


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## Homerhomer (Oct 18, 2010)

eulogy said:


> I can get the money out without the tax being withheld. I technically have to pay CPP on it (not EI), but my CPP/EI are both maxed out earlier in the year.
> 
> .


If your cpp is maxed out from another source (employment) it doesn't affect your witholding from the corporation, the two are independent and if you draw in such a way that requires witholdings, CPP must be witheld by your corp, on the personal side you will get it back when filing personal taxes, but your corporation is out of pocket.

That's why I said to charge the consulting fee and claim it on your personal taxes, if you are charging less than 30K you can do it without charging GST, if you charge more than that then you have to register for GST personally.


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## eulogy (Oct 29, 2011)

That could have been what was done. I have taken money out without withholding. My accountant must of did it that way. 

And it's 30k for GST. I thought it was 25k. Either way the only amount I'd probably take out is $5k-10k a year.


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## TaxGuy (Apr 7, 2009)

FrugalTrader said:


> If you're a dividend investor, one thing to consider is to invest within a corp. The money is only taxed 15%, so you have a higher capital base to invest with. You can then flow through the eligible dividends to the shareholder and the corp will not owe any tax. The result is a greater income stream than if you were to withdraw the cash first and invest personally.


When a private company receives a dividend from a public Canadian company, there is a refundable tax of 1/3 of the dividend received. When the dividend is paid out, the refundable tax is returned and effectively there is a straight pass through of the dividend.


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