If you own a Canadian corporation, taking full advantage of your status is a great way to maximize profits. One key way to do that is by withdrawing money from your business in a tax-efficient manner. So, what should you do to take advantage of this opportunity?
In this article, we’ll explore five tax-efficient ways on how to pay yourself as a Canadian corporation owner.
1. Registered Retirement Savings Plan (RRSP)
Setting up a Registered Retirement Savings Plan (RRSP) is a very beneficial way to reduce the amount of Canadian corporate Taxes.
All contributions made to the RRSP are eligible for tax deductions, and any investment income earned from-within-an-RRSP will not be taxable until it is withdrawn. By making strategic use of an RRSP, individuals can save for their retirement with more efficiency and effectively minimize their tax burden.
2. Counting Family Members
Hiring family members is a great way to grow and develop your business while also tax-efficiently distributing the profits among its members. By hiring family members, you can pay them a salary which is then deductible from your taxable income. This is an excellent way to show your support for a loved one’s career aspirations, as well as being mutually beneficial for the success of your business.
Having family members work for your business brings added benefits and responsibilities. To be deductible, the salary paid to family members must reflect what the role is worth in the marketplace.
In addition, normal payroll taxes must be paid for salaries received by family employees. Furthermore, it’s essential that you keep accurate records of payments made and time worked by each employee (even those related) to remain compliant with CRA regulations.
3. Tax-Free Savings Account (TFSA)
A Tax-Free Savings Account (TFSA) is a great savings tool for entrepreneurs. Money that is deposited into a TFSA is not subjected to any taxes, and when the funds are withdrawn, there won’t be any taxes due either.
Withdrawing from the account offers flexibility, allowing users to invest in short-term and long-term investments. This allows for the diversification of your portfolio and potentially higher returns.
Additionally, you can withdraw funds at any time without incurring any penalties or taxes. This makes it ideal for those who may need access to cash in a hurry or who want more control over their finances.
4. Capital Gains Exemption
The exemption applies to any profits you make when selling qualified small business corporation shares. It’s important to note that in order to qualify, you must have owned the shares for at least two years and not used them for personal gain.
When taking advantage of this exemption, you’ll be exempt from paying any taxes on up to $892,218 worth of capital gains. This can be significant savings if you’re looking to get some cash out of business without having it all taxed. You’ll still need to report the sale of the shares on your tax return but won’t owe anything on those profits.
It’s also important to keep in mind that there are certain restrictions when it comes to using this option. For instance, if you’ve already used up your lifetime capital gains exemption, then this won’t be an option for you.
5. Pay as Dividend
Dividends can be a way for a corporation to distribute profits to its shareholders, including family members. However, it’s important to consider the tax implications before doing so.
The new tax on split income (TOSI) rules and corporate attribution rules must be taken into account to ensure that the distribution is done in a tax-efficient manner. It’s also important to consult with a tax advisor to avoid any punitive tax results under these rules.
Final Thoughts
When done correctly, you can use these tax-efficient methods to withdraw money from your business while minimizing the amount that you owe on taxes. This will ensure that you get to keep more of what you have earned through running your own business.
