If you’re finding yourself asking the questions to the below questions – this article should help you get some clarity!
“How much money should I declare from my corporation?”
“What’s the best way to withdraw money out of my corporation?”
“Do I have to declare all of the money I take out of my corporation as income?”
Smoothing of Income
The general concept behind this is, as a corporation owner you want to try and smooth out your personal income as much as possible – meaning you don’t want some year’s personal income very high which may push you into higher tax brackets, and other years be very low, you want to keep generally level depending on your actual personal financial need – As your personal income goes up, you start going into higher tax brackets, which is what you want to avoid – see personal tax rates for Ontario Canada in 2022:
So a quick example if over 2 years you wanted to pay yourself overall 200k, the timing of when you take these payments makes a big difference:
Shareholder Loans
Shareholder loans are a great way to be able to tax plan effectively. Essentially a shareholder can take a loan from their corporation and not have to count this as personal income, as long as it’s paid back within 1 year after the corporation’s year end. How can you utilize this? Let’s take a simple example related to the above example of smoothing income.
Let’s say your overall goal is to take 200k out of your corporation over 2 years, but in year 1 you need a bit of extra cash to buy a car for 25k. You pay yourself a salary of 100k, and then take a shareholder loan for 25k, and in year 2, instead of paying back the corporation that money, you can just declare that 25k as a salary or dividend which get’s included in your personal income, and then you would declare an additional 75k of salary to get you to that overall 100k mark which was your goal.
You’ve essentially been able to take out additional money when you needed it, but still only declared 100k in year 1, and 100k in year 2, thereby smoothing out your income to be most tax efficient.
What’s the catch?
The catch is that you there must be a CRA mandated minimum interest charge being charged on the loan and being paid, and if this money is not paid back within 1 year from the corps year end, it must be included into your personal income, even if you don’t want to.
Shareholder loans are tricky and there are some specialized rules surrounding it, so advice from a qualified accountant is always recommended when utilizing these more advanced tax planning strategies.
**Disclaimer
This article provides information of a general nature only. It does not provide legal/accounting advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific questions you should consult a CPA/lawyer.