As an owner-manager of a private Canadian corporation, you most likely have surplus cash accumulating in your company. Now, you may wonder what to do with this asset. Should you retain the funds in the company? Or should you withdraw the funds while paying minimal tax?
In this article, an experienced Ottawa CFP explores the main questions you should consider before deciding how to use surplus cash.
Do you need the surplus cash for business purposes?
It is best to ask yourself if you need surplus cash for short-term needs in your business. For example, do you pay income tax installments or GST? Are there seasonal slow periods in your business that needs additional cash? Will you make significant purchases or pay down debts soon?
If you are not using your surplus cash for business purposes, you will be taxed on the earned investment income at corporate investment tax rates. And these rates are slightly higher than top personal tax rates.
Do you need the excess cash for personal needs?
Income tax installments that must be paid on time and significant purchases like education costs, vacation property, wedding expenses, or down payment for a house are all personal needs. You must consider when you need the funds if you have to use surplus cash from your corporation to fund these needs. It would also be best if you understood the tax consequences and the possibility of withdrawing severally over time to minimize tax costs.
What is the purpose of the funds?
Why should you withdraw your surplus cash if there is no business or personal need? Excess income remaining in the company is taxed at a higher rate than the highest personal tax rate. So, it may be beneficial to withdraw the funds, paying as little tax as possible.
You can analyze your longer-term goals before withdrawing the funds. These goals include;
a. Retirement planning
You have to consider if you will use the funds for retirement by contributing to a Registered Retirement Savings Plan (RRSP), Retirement Compensation Arrangement (RCA), or an Individual Pension Plan (IPP).
b. Estate planning
Before passing it to your family, you must consider if you want to enhance a property’s value. Many potentially effective estate-planning strategies are insurance-based solutions. The funds grow on a tax basis, and you can access them at retirement to supplement your retirement income which may or may not be paid out tax-free on death.
c. Asset preservation
You can transfer excess cash to a holding company if you want to mitigate the risk of the funds being subject to claims from corporate creditors.
How should you withdraw funds from the corporation?
The following strategies can help minimize tax consequences when you want to withdraw funds from your corporation:
Les stratégies décrites ci-dessous peuvent vous aider à atténuer les conséquences fiscales lorsque vous souhaitez retirer des fonds de votre entreprise :
a. Tax-free strategies
Expense reimbursement – always record any business expense you make personally. When you get reimbursed from the company funds, you won’t pay tax on the received funds, and the business may get a tax deduction for the expense.
Repayments of shareholder loans to the company – shareholder loans include personal assets you have transferred to the company without payment or dividends declared but not paid to you. These loans can be repaid without tax consequences.
b. Taxable strategies
Paying yourself a higher salary or dividend is a taxable strategy for withdrawing funds from the business. Although you may pay personal tax in a taxable dividend, your corporation can get a tax refund if it has a “refundable dividend tax on hand” (RDTOH) balance. And in some cases, the refund to the company may be higher than the personal tax you pay on the dividend.
When you have surplus cash in your private Canadian company, the best thing to do is analyze issues to determine the best way to use the funds. The order of priority should be business needs first, then personal needs. And if you don’t need the cash for these, you can consider if there is any impending long-term goal. Finally, when withdrawing your funds, it is best to consider the most tax-effective way.
As a reputable Ottawa-certified financial planner, we will happily work with you to help preserve and maximize the surplus cash for business and personal uses. Contact MDL Financial Group today!