Should you leave corporate savings in your company?

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Chris has a lot of money saved in his corporate bank account and wants to take it out with the least amount of tax.

Should you leave corporate savings in your company?

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I have $1 million accumulated in my corporate account. I don’t need that money for my corporation. What is the best way to take that money out with minimal tax? I’m 39 and I’m not planning to retire soon.
—Chris

Withdrawing money from a corporation to invest

One of the first things to identify here, Chris, is your goal behind withdrawing the money from your corporate bank account. If you want to invest it, you can open a corporate investment account and transfer the funds into it. This way, the money stays within the corporation, and it won’t be considered a taxable withdrawal. The personal tax that can be deferred by leaving corporate savings in a corporation can be more than 40%. This is a compelling reason to incorporate your business and to accumulate savings within it.

Given the potential investment income from a $1-million corporate investment account, I should mention that recently introduced corporate tax changes may impact the taxation of your business income after you invest the funds. 

As of 2018, if a Canadian-controlled private corporation (CCPC) earns more than $50,000 of adjusted aggregate investment income (AAII), its $500,000 federal small-business limit will be reduced. The small-business limit allows up to $500,000 of profit to be taxed at the 9% federal small-business tax rate instead of the 15% active business income tax rate. There are provincial or territorial taxes payable as well, and the provinces and territories have their own lower small-business and higher active business income tax rates that may be impacted by investment income earned. 

At the federal level, if your investment income exceeds $150,000 in a year, the full small-business limit is eliminated. 

If you have room in your registered retirement savings plan (RRSP), Chris, you could make a withdrawal from your corporation and more than offset the tax payable on that withdrawal by making an RRSP contribution. 

If you have room in your tax-free savings account (TFSA), it is probably advantageous to make withdrawals from your corporation to fund your TFSA. The upfront tax on your corporate withdrawals can be offset over time by the tax-free growth in your TFSA. 

Does your corporation have a CDA or RDTOH balance?

You should determine if your corporation has a capital dividend account (CDA) balance. That may not be the case if your $1 million of savings has come from business income alone, as a CDA balance can arise from capital gains realized by a corporation. Half of a capital gain gets added to the CDA balance, and a corporation can pay this amount out to a shareholder tax-free. 

You should also determine if your corporation has a refundable dividend tax on hand (RDTOH) balance. Again, this may not apply to you, Chris, as RDTOH accumulates when a corporation earns investment income. The corporation pays tax on that income, some of which is refundable in the future if taxable dividends are paid out to a shareholder. 

I assume your $1 million of corporate savings has likely accumulated from profit earned running your business, and you will have already paid corporate tax on that profit. The payment of after-tax profits from a corporation is taxed as a dividend to a shareholder at reduced personal tax rates that take into account the corporate tax already paid. However, the tax could still be as high as 49% depending on your income and your province or territory of residence. As a result, withdrawing all of the funds in a lump sum could be pretty expensive, Chris. 

Other considerations for withdrawing corporate funds 

If you need the money for personal reasons like a down payment on a home, you might consider taking some dividends but leaving the rest of the funds in the corporation to defer some of the personal tax. By making withdrawals over a few years rather than taking the money out all at once, you may be able to benefit from lower tax rates.

However, taking on a larger mortgage, in the example of a home purchase, could be a better option than losing half your corporate withdrawal to personal income tax. That is, if you were to make a large corporate withdrawal for a bigger down payment, you could have over 40% tax payable on the income. 

If your business could be sold in the future, you may want to consider establishing an investment holding company to move your corporate savings into another corporation. This may enable you to qualify for the lifetime capital gains exemption, allowing a tax-free capital gain of up to $913,630 on the sale of qualified small-business corporation shares. A holding company is also worth considering if you could have creditor or liability risk with your business and want to protect your savings. 

There are different corporate structures that involve an operating company and an investment holding company. The basic idea is to shift savings out of the operating business and into a separate company meant strictly for investing. 

In summary, Chris, if you want to invest the money, making some withdrawals to fund RRSP and TFSA contributions could be advantageous. If you need the money for personal use, you may be able to make strategic withdrawals over a period of time. But if the primary goal is to invest the money, corporate cash can be invested in stocks, bonds, guaranteed investment certificates (GICs), mutual funds, exchange-traded funds (ETFs), real estate, other businesses and other assets. Personal tax deferral can be a real advantage of incorporation. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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