My friend James owns a manufacturing company and was interviewing for a warehouse manager position.
One candidate – a balding gentleman – excused himself after five minutes and returned to the interview room wearing a hair piece. Sort of odd. I guess some people just don't plan ahead very well. Turns out he didn't get the job.
Failing to plan ahead when it comes to your income taxes can be even more costly. Last week, I shared some tax issues related to those who own a corporation. This week, I want to share a primer on how to get money from your company in a no- or low-tax manner. Here are the top ideas to consider.
1. Take repayment of shareholder loans. If you've loaned money to your corporation, you can take repayment of that loan with no tax implications, so consider taking repayment to meet your cash needs. You can create a shareholder loan owing to you if you transfer assets to your corporation for any reason, which can generally be done without triggering tax (as part of an estate freeze, for example).
2. Pay dividends to a holding company. If you have a corporation – perhaps an active operating business – with cash that you'd like to access, it's generally possible to have your corporation pay dividends on a tax-free basis to a holding company that owns its shares. Once the cash is in your holding company, you can reinvest those dollars in whatever way you see fit. You can even lend those dollars back to the operating business on a secured basis, which provides some creditor protection over those dollars.
3. Pay capital dividends. Your corporation has something called a "capital dividend account" (CDA). It's an account on paper only, and is generally made up of the tax-free portion of any capital gains realized by your corporation over time, any capital dividends received by your corporation, and the value of most life insurance proceeds paid into the corporation. If your company has a CDA balance, tax-free capital dividends can be paid to you.
It's a good idea to pay out these dividends periodically because it's possible that your CDA balance could disappear later if, for example, your company realizes capital losses.
4. Pay dividends to low-income family members. If you have adult family members who are shareholders of your corporation, you can pay up to about $50,000 (varies by province) in tax-free dividends if that family member has little or no other income. If your family doesn't own shares directly, the same can be accomplished by paying dividends to them through a family trust of which they are beneficiaries.
5. Withdraw your paid-up capital. The shares you own in your corporation have a "paid-up capital" (PUC) amount, which is a sort of cousin to the adjusted cost base of your shares. The PUC is the amount you're able to extract on a tax-free basis from the corporation, and most often is the amount you paid for your shares. There are different ways to go about withdrawing your PUC (redeeming shares with PUC is one option) so be sure to speak to a tax pro first.
6. Reimburse yourself for expenses. If you've paid for any business expenses out of your personal pocket, be sure to have your corporation reimburse you for these. You won't face tax on the amounts.
7. Pay yourself rent. If you have an office in your home where you carry out some of your work, why not have your corporation pay you rent for that space (even if your business has other offices as well)? You'll have to report the rents as income, but can claim a deduction for a portion of your mortgage interest, property taxes, insurance, repairs and maintenance, utilities, and more. In the end, the expenses could fully offset that rental income, resulting in no tax to pay. You'll have effectively withdrawn funds from your corporation on a tax-free basis.
8. Pay salary to low-income family members. If you have low-income family members capable of providing services to your business, consider paying them salary or wages to do that. Your business will get the deduction, and your family will pay no tax on the first $11,635 of taxable income from all sources thanks to their basic personal credit.
9. Borrow from your corporation. Loans from your corporation are generally taxable to you, but loans to acquire shares from the treasury, purchase a vehicle for use in your business or to refinance a home can be tax-free – but only if certain conditions are met. (see my article from last week).
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.