Canadian Controlled Private Companies (CCPCs), such as professional corporations, are excellent tax-deferred investing vehicles. However, to withdraw money from a corporation to spend personally, you must still pay tax. There are good reasons to do that. Smoothing cash flow to reduce taxes is one of the benefits of incorporating a business. For large withdrawals of money from your corporation, plan in advance to minimize the tax hit.
That means more money left in your hands to pay down your debt, buy a house, fill up your TFSA or RRSP, or whatever big splurge you are planning for. You should consult your accountant in advance of a big spend to help you plan. However, some basic education will help you understand what they are talking about or suggest options that they may not have considered. Learn six strategies to tax plan and efficiently move money out of your corporation to spend personally.
Withdraw Money, Get Corporate Tax Refund
It is very common advice to leave as much money as possible in your corporation. That allows for more partially-taxed capital to invest and grow. However, there are also tax measures in place to prevent us from having a major passive income tax deferral advantage. Interest and dividends received by a corporation are taxed at close to the highest personal tax rate upfront. About 50% for interest and foreign dividends and 38% for Canadian eligible dividends.
You may have an unclaimed tax refund.
Fortunately, you get some of that refunded back to the corporation when you pay out the money as dividends (and pay personal tax). That is tracked using a notional account called refundable dividend tax on hand (RDTOH). It is “notional” because it only exists on paper as part of corporate tax filing. However, it represents real money held by the government instead of your corporation. You can find out your RDTOH balance by asking your accountant. Or if you are masochistic and can translate Klingon, by checking your corporate tax filing.
Are you passing up the tax refund for no good reason?
If your personal income is less than in the tables below, then the tax you pay personally to take out a dividend is less than the tax already collected as RDTOH. So, if you are below those incomes and have nRDTOH or eRDTOH sitting in your corporation’s notional accounts, then paying an ineligible or eligible dividend respectively is very tax efficient. Your corporation gets refunded more tax than you pay personally. Even if you don’t need the money personally, it makes sense to pay out dividends. You could invest the excess personally, or save more of your spouse’s income to income split. I would be having a chat with my accountant if I unearthed this issue.
A big spend to release trapped RDTOH and prevent or relieve corporate bloat.
If your income exceeds the levels above, then it doesn’t make sense to pay out dividends to release the RDTOH if you don’t need the money. You would pay more personal tax than is refunded to the corp. That RDTOH is trapped and it can happen if you build a huge passive income spewing corporation with little personal spending. You don’t want to have trapped RDTOH. However, if you are planning a big spend, then that is an opportunity to set it free. This is illustrated below.
The other way that tax law discourages you from generating too much passive income in a corporation is the passive income limit. If you exceed the threshold, then your corporation pays much more tax. One dollar of passive income bumps five dollars of active income to the higher tax rate (5 X ~15% = ~75% higher tax rate). You cut that in about half, if you are paying out excess dividends, but it is still pretty bad (except in Ontario and New Brunswick). So, decompressing your corporation to spend personally not only helps to prevent bloat by growing less passive income in the corporation moving forward. It also helps you pass some gas, if you already have some bloat.
Use a Tax-Free Capital Dividend
This is probably the most tax efficient and least risky way to withdraw a chunk of money out of your corporation. However, to do this, you must build up a positive balance in your capital dividend account (CDA). There are several ways to do that and it takes some paperwork to get the money. Hence, you should plan the withdrawal from the corporation in advance.
What is your corporation’s CDA and a capital dividend?
The capital dividend account is a notional account. That means it only exists on paper to be used as part of the tax filing for your corporation. When you sell an investment that has increased in value, you have realized a capital gain. Only half of a capital gain is taxed and the other half is excluded. That is intentional to account for inflation and encourage the risk-taking required to grow our economy.
In a corporation, the excluded half of the realized capital gains or losses are logged in the capital dividend account. If the gains and losses add up to a positive balance, then you can have your accountant file a special election for a capital dividend. You can then pay yourself or a non-voting shareholder (like a spouse) a tax-free capital dividend. Not only useful for spending, but also for income-splitting.
Capital Gains Harvesting To Build A Tax-Free Capital Dividend
One way to build your CDA is to harvest capital gains. If you have investments in your portfolio with large unrealized gains, you can sell and then immediately re-buy them. That means that you won’t miss time in the markets, but the gain will be booked and taxed.
The taxes paid on the capital gain are much less than the tax saved by giving a capital dividend instead of regularly taxed corporate dividends or salary.
If you are also paying out some regular dividends to live off of, then the RDTOH makes the net corporate tax only 10%. Even if not releasing the RDTOH now, that is a 25% combined personal tax bill now. Usually much less than your personal marginal rates you would pay to withdraw money from the corporation normally.
The other nuance to consider is that the included half of the gain, if really large, could bump the corporation over the active-passive income limit. As mentioned in the previous section, that could raise the corporate tax rate substantially (or provide a net tax benefit in Ontario or New Brunswick). We actually do harvests routinely when our capital gains are in the 60-70K range since it keeps it small, but large enough to offset the accountant fees of electing a capital dividend (a few hundred bucks for us).
Corporate Donation of Appreciated Securities
If you make giving to charities a regular financial habit, it not only makes you happier. It has tax benefits. For a corporation, donating stocks, ETFs, mutual funds, or other publicly traded securities to a registered charity has triple the benefit.
The tax liability from the capital gain disappears and the donation is a deductible expense. That deduction can be applied against investment income (50% tax rate) or against active business income tax rate. Here is the big bonus – you get the full capital gain (not just half) added to your CDA.
Wow. A massive tax break and maybe even a plaque on the wall of an institution.
Shareholder Loans: Withdraw Corporate Money Now. Pay Less & Later.
If you are not constantly in the highest tax bracket, then spread income out over several years using shareholder credits and loans. That reduces the amount that is bumped up into the higher tax brackets. This requires planning, but can usually be done in close collaboration with your accountant. Even if you want all of the money in the near future. Here are some ways how.
If it is January or maybe February and you are planning a big spend this year, then you may be able to shift some of the income into the previous personal tax year. This would need to be done as your T4/5 slips are prepared for your corporation’s payroll.
Income is considered taxable when it is received. So, to avoid this problem when you get the cash in Jan/Feb, it needs to be recorded as being “paid by way of a credit to the shareholder’s loan account” for December 31st of the year just finished. If it is not recorded that way, then it will be taxed in the current year.
When you withdraw the money from the corporation in Jan/Feb that simply brings the shareholder loan account back up to neutral. That is best done using a dividend. If a bonus (T4 income) is used, then CRA may get antsy if payroll tax remittance wasn’t sent in on time (with big late penalties). The one time to consider a salary bonus is if it is to max out your RRSP and deduct that from your income (talk to your accountant first).
A shareholder loan can also be used to temporarily advance funds. You can take a shareholder loan from the corporation to withdraw money now and not immediately count it as income. You must log the loan in the corporate minute book. It gets reported on the next corporate tax filing and must be fully repaid before the subsequent corporate tax filing. If not, then the remaining balance is considered to be taken as personal income. This is one of the reasons why having a corporate year end staggered to the personal (calendar) year end is helpful for tax planning. Plus, you want a happy well-rested accountant by avoiding tax season.
Optimally, you could conceivably use shareholder loans to spread personal tax over four years as illustrated below. If your timing isn’t perfect, you could still likely spread the income and taxes over two years. Hence, planning in advance can save you money.
Book-Keeping & Interest
You do not need a formal loan agreement. However, it is vital to work with your accountant to make sure that the T4/5s are done properly. You must also ensure that the nature of the loan, credits, and dividends are logged in your corporate minute book properly whether by you or your lawyer. Interest must be paid on the loan at CRA’s prescribed rate for each quarter. You may opt to do that with cash or your accountant can usually reconcile that when they do your corporate filing. Unpaid interest is deemed a personal taxable benefit.
Specific Purpose Employee Loans
It is possible for a corporation to loan money over a longer repayment period than a shareholder loan. However, the criteria are fairly complex. So, it requires planning in how you set up and run your corporation. It is an employee loan. Hence, it must be available to all employees and not just you. Further, you must be an employee (collect salary) and not just be a shareholder.
CRA has taken a pretty hard stance on these and the burden to demonstrate that this is due to an employment role and not a shareholder benefit is high. If you have significant influence over the businesses policies, then it is likely to be deemed a shareholder loan. Unfortunately, that is most professional corporations or small businesses.
The arrangement must be made and documented properly at the time of the loan, along with a “reasonable” repayment schedule. The sooner you consult and involve your tax professional with this planning, the better. Both to ensure that you can do it (you probably cannot), and that it is done properly. The most sought after loan would usually be for housing.
A home purchase or relocation loan
The purpose of an employee home loan must be to purchase a dwelling to live in (not a secondary property). It can be made to an employee or their spouse. Interest must be paid at the CRA prescribed rate at the time the loan was issued. The rate may decrease, if prescribed rates do, but cannot increase past the original rate. The interest rate is reset to the prevailing CRA prescribed rate every five years.
If the new home is >40km closer to a new work location, then it can be a relocation loan. A relocation loan changes to a new purchase loan if it is not repaid within five years. You cannot hold more than one relocation loan.
Return of Capital
This option only applies to business owners that used a big chunk of personal money to start up their business. There are many nuances. So, this is definitely something to seek professional advice when considering.
Repayment of a credit to a shareholder
The owner may have loaned money to the corporation to get the business running. The inverse to taking a shareholder loan from the corporation. Repaying that loan to the owner would be a tax-free way to withdraw money from the corporation back to personal accounts. Alternatively, you could collect interest on that loan. However, that would be taxable as income. Plus, there could be triggering of the TOSI rules if it is paid to a non-voting shareholder.
Return of capital from purchase
If you bought your business or practice from someone, or together with a group of people, then you may have an identifiable cost per share of the corporation. The total amount paid for shares in a Canadian corporation is documented as the Paid Up Capital (PUC). The PUC is part of the Stated Capital of a corporation.
Commonly, private corporations issue different share classes as partners buy in so that each class has an associated PUC. The PUC from a share class can later be distributed back to the owners tax-free as a return of capital (ROC).
Change in adjusted cost base
The cash that you paid to start your business forms a “hard adjusted cost base (ACB)“. If you return capital from that, then it reduces that ACB by the money taken out. Simplistically, if you paid $100K to start your business and took $75K as ROC, then the ACB becomes $25K. That means when you do eventually wind-down or sell the business, the value minus that $25K becomes a capital gain. Essentially, this means that ROC gives you tax-free money now while increasing the capital gain deferred to the future. That future tax liability could even be attenuated by the lifetime capital gains exemption, if you are running an active qualifying business.
Capital Gain Surplus Stripping
Capital gain surplus stripping is a complex tax ninja maneuver to allow retained corporate earnings to be withdrawn into personal hands as capital gains instead of regular income or dividends. This is not to be confused with the capital gains harvesting mentioned earlier in this article. You do not require corporate investments with capital gains for your CDA to do this. However, you do require boutique tax lawyers and accountants and the will to move in the shadowy grey areas of tax planning.
The fees for setting up a capital gain surplus stripping pipeline can range from a few thousand to tens of thousands of dollars. So, you would only want to consider this if the fees will be offset by the tax savings. That generally means moving hundreds of thousands of dollars to be cost-effective.
The other consideration is legal risk that often comes down to a subjective determination of intent. Surplus stripping is currently legal, but the CRA has challenged it in court with mixed results. The government tried to change the laws to prevent it in 2017, but that was abandoned when it caught farmers and fishers in the net. Not good political optics. However, this is in their sights. So, the shelf-life of this option is uncertain. Further, some physician colleges may also complicate the maneuver by blocking MPC shares being held by other corporations.
So, when would I consider surplus stripping?
I would need to have an immediate use for the money, have hundreds of thousands of dollars to move, and consult with a tax specialist. Their fees would play a role. As would whether subsequent defending of challenges by CRA are included in the cost or not. It is easy to recommend something and collect large fees if you have no other skin in the game. You will find wildly varying opinions, but that is mine.
We haven’t pursued this because with our income splitting strategies and capital gains harvesting, we haven’t needed to. About 2/3 of our money has been slowly and efficiently siphoned out of our corporation over time. However, if we hadn’t done that and needed a large chunk of personal cash, then I would look into it before the government regroups and closes the door.
Summary of Ways To Withdraw Big Money From Corporations
The big six ways to withdraw big chunks of money from a corporation tax efficiently are summarized below. I hope to revisit each of these strategies, with examples, in some future posts. However, use this knowledge to plan in conjunction with your tax professionals because there are many nuances.
I think there is one more method you didn’t talk about. What about leverage?You could take a loan to buy “income” stocks/ETFs and using the carrying charges to reduce your taxes. Its a bit of a risk (if the markets go down) but over the long term I would assume you would be in a much better financial shape over 10 years or so. Thouights?
I look at leveraged investing a bit differently. It is a way to boost potential risk/return. So, it would hopefully result in growing more in your corp over time and ultimately having more money to move out. This article was targeted more to what to do if you have a chunk of money in your corp already and want to move it out now into personal hands.
You could indirectly use leverage in the sense that if you want to pay a capital dividend, ROC, shareholder loan, or other dividend to release RDTOH but don’t want to decrease the cash invested in the corp, you could use the corp LOC to do the pay-out. Again, that functionally translates into leveraged investing and (hopefully) long-term growth in the corp.
“…This article was targeted more to what to do if you have a chunk of money in your corp already and want to move it out now into personal hands….”
I guess what I was thinking was that once you want to move/continuously move it to personal hands say in retirement, there are little or no tax breaks (true even for an RRIF). You take it on the chin. A personal loan would provide carrying charges that could be deducted from the income (so long as you invested it for income) from the Corporation or the RRIF. Just a thought….
Yes. That is a great topic in itself. For that type of flow through, I like the idea of loan to deduct interest against income (save 50% rate) and invest in something that pays combo of eligible dividends and capital gains taxed at a lower rate. Not only leverage but a tax savings too.
Seems like the courts set a very high standard for determining that a housing loan is being received in the capacity of an employee rather than the capacity of a shareholder.
Thanks for the link Alpha Doc! Reading that case, there were a number of problems. They logged it as a shareholder loan rather than an employee housing loan. They also did not have an agreement to pay any interest. Plus, the business owner was in the habit of funding himself with shareholder loans on a regular basis. I would definitely want to make sure that I was setting up, logging, and repaying by the book if I were to do it. Part of why it is important to learn about this stuff and use an accountant. The owner in that case used an accountant, but being an educated client is definitely important too!
There is another interpretive bulletin that one of my accountant friends pointed me to. If you have a significant influence over the corporation’s policy, then it is likely to be deemed a shareholder loan. That is most MPCs. I updated the article to highlight that.
You do realise that by taking a home loan and paying tax on the taxable benefit there is an element of double tax – the loan eventually has to be repaid and then there will be additional tax when the funds are eventually taken out of the company.
That been said I can’t see how a MPC with one shareholder/employee can provide a loan and have it treated as an employee benefit. It is a shareholder benefit.
That is right Terence. It is largely a way to advance funds in a large chunk, repay and hopefully move them back out more smoothly at a lower marginal rate down the road. I put this strategy in the article because it gets asked about a lot, there are bits and pieces alluding to it around the internet, and I occasionally hear of someone being advised about it.
It is pretty much impossible with an MPC or other single/couple employee situation. I mentioned that in the article with a link to the CRA interpretive bulletin. It would be seen as a shareholder benefit. Thanks for bringing it up and I have gone back to the article to bold that section. It is really important to emphasize that it won’t work for most of us and why.
There is a ton of dense little gold nuggets in this post. Wow! I need to re-read it like 10 more times, and go back and study some of your older posts on moving money out of the PC. Thank you!
Thanks Cowtown Cutter. I did this one to pack it all into one post as an over-view because the question comes up so often. That way people can come back to it repeatedly when the time is right. However, that definitely made it nugget-dense 🙂 I plan to re-write some of my older stuff and some new stuff to unpack each piece separately too, but I like to make a hub article (like this one) and then build out spokes.
Accountant here (of the ‘ninja’ variety; spouse is MD, specialist in Ontario – with one of the first MPCs in Ontario… after all, deferral is the third ‘D’ in the trinity (after Deduct & Divide). This is probably the best summary I’ve read regarding extracting RE from corporations – bravo!
There is one additional way to remove retained earnings (RE) that you may wish to include (as it can be done tax free) – that is high cash value life insurance; it must be engineered to focus on cash value – not our parents’ garden variety type. We were first exposed to this approach in 2005, by MD Insurance (long since sold to Industrial Alliance), which was part of MD financial – now that investment arm was sold to Scotia, don’t think there is anything left there. That said, I’ve assisted a number of people to implement this approach effectively – many can’t/ won’t do it, as it does require about a 10 year timeframe to make it efficacious, but it works really well for those that plan ahead.
Thanks for reading the blog and for commenting. This article is aimed more at strategies to get money (in whatever form) out of a corp in the near-term. There are many long-term strategies to build and move money out efficiently in a long time-frame. Permanent life insurance (in various permutations) is one way. It takes advance planning and a long timeframe to work out. There is also building a tax efficient portfolio with asset location strategies. There are also other financial products that can be used, like corp class funds and IPPs.
I think of whole life as more of a financial product than a strategy per se. You buy it, it pays out, and there are some tax characteristics to that. Kind of like mutual funds, ETFs, IPPs, or other investments. You use those products as tools in a larger strategy. So, the question is, which leaves you the most after-tax money in your hands in the end? That is a combination of the return of the investments minus the fees/taxes that drag on that growth and then minus that taxes to move the money out. For life insurance, it is a safe (and low) return. As you would expect. The taxes to move money out at death are low, and you could borrow against it (and pay interest) while alive. Higher returns are often quoted, but there is a drag on that because the insurance side is priced higher than a comparable Term 100 policy (not mentioned in the quote) and there are fees and adjustments made to the “dividends” on the investment side (pretty opaque). When the insurance company builds and prices the policy, they build that in. You could return more or less, if the actuarial predictions don’t pan out. So, it is a way of diversifying with actuarial risk instead of market risk. We have a small amount in our corp. I bought it (via MD also) with the intention of having a tax-efficient safe low-returning investment to balance my more aggressive ones. It would not come out ahead against a more aggressive investment portfolio and that is what disappoints most who don’t realize that. I also think that HBB (a corp class bond ETF) would be another way to have a low, safe, tax efficient return that is more liquid and has less upfront cost. It is a great topic, and is on my todo list. Ben Felix did a nice analysis on permanent life insurance returns recently.
Some good points – especially concerning long(ish) runway required to make it viable. Apart from needed insurance as our kids were under 10 at the time, our original plan was to overfund it, then borrow against it, 20 years from inception, to enhance income, without a negative impact on OAS clawback, lower tax brackets, etc (bean counter in me…).
Time flies – 20 years is up in 2 years … will both be ‘hanging up the skates’ then – having the stable (lowest return was last year, at just over 6%), non stock correlated, untaxed, income enabled more aggressive investments than we would have otherwise done; been ‘harvesting’ capital gains using some of the approaches outlined in your great summary article.
Thanks for bond alternative – will look into; not sure if it was spared the carnage in the bond market last year? Horizons ETFs may also work and likely have a lower cost structure.
When I looked into life insurance as an investment, I came to the following conclusions. Assume that the purpose of the investment is as a legacy after I die. Assume that if I didn’t buy insurance, I would invest the money in fixed income. With those 2 assumptions, life insurance as an investment made sense. But other than that, it didn’t.
I’ve read that it’s uncommon for overhead and profit to take less than 30% of the cost of insurance. So the expense ratio is effectively 30%. There can be tax advantages to insurance, but that 30% headwind is not easy to overcome. And insurance is long term in nature, which means that there is considerable time for laws to change and those tax advantages to decrease.
IMO, insurance as investment doesn’t make sense. Insurance is a tool to decrease my risk. But with investing, I increase my risk, with the expectation that the risk will rewarded with increased return.
I would be happy to be proven wrong.
Thanks Park. That is how I look at it too. Insure against disaster. Invest to take risk for a return. There is a lot of marketing with insurance products that clouds that. I believe the estimate of 30% fee drag, but it is well hidden.
I think that one problem, is that the true return on policies is really hard for people to realize because the costs of the insurance aspect and the way it is reported on statements hides some of the other fees. For example, people don’t realize that they functionally pre-paid huge fees by virtue of the insurance side being about double a comparable Term 100 policy. Most people also don’t need Term 100 in the first place – they don’t need to insure against death when their assets cover their lifetime liabilities. That makes the functional cost even more compared to just the insurance needed (like Term 20) and investing the rest in a low cost diversified portfolio.
In my policy, there is also an upfront fee for each contribution to the “investment” side that isn’t counted in the reported return. The “dividends” are reported, but the underlying investments would have returned much more pre-fees. Those dividends are then “adjusted” too.
The cash value increase on my statements makes it look like a 3-5%/yr return. However, I don’t need life insurance at this point for insurance reasons. So, considering it purely an “investment”, and using the value minus the money put in, my returns are still negative. I will likely have a zero return around age 58 and then pull ahead after that. If my wife or I live to a ripe old age (it is a corp joint last to die policy), it will probably work out to a compounded fixed-income-like return. If not, then lower. Actuarial risk.
I really need to write a post or two dedicated to the topic, but thanks for chiming in also.
Thanks for writing such a comprehensive article. I will need to re-read this again
This was timely as I just had a discussion with my accountant and I’m left still very confused
In strategy 1) If I simply sell a large position in the Corp I need to hold roughly 25% for tax.
In strategy 2) if I use the method described above for capital gains harvesting then I can move half the amount to personal and not have any personal tax liability but need to pay a 25% tax from the Corp.
I don’t understand what the advantage is of doing the former since the tax rate is roughly the same but in the latter strategy you have half the money in personal account. If I wanted to move this out later I would be faced with a dividend tax so by definition tax overall would be higher. What am I missing as I’m confused as the message I get is that it’s better to do the former if you don’t need to spend the money?
Thanks so much
If you simply move money out of your corporation (whether you sell something to do that or have cash), then you would pay the ineligible dividend rate on the money moved out personally (about 48% top bracket in Ontario for example). If you happen to have some RDTOH that was collected previously due to passive income, but not released because you hadn’t paid out enough personal dividends – then that softens the blow with RDTOH refunded to the corp (about 30% refund). So, the combined personal/corp rate is low (<20%). If you don't have unrefunded RDTOH sitting around, then there is no corp refund. Just personal tax. So, not great. 48% tax. It would only be useful to do (even if you don't need the money) if you have unreleased RDTOH in your corp and you are in a low personal tax bracket (lower than the refund rate).
If you have a positive CDA from realizing capital gains in the corp, then you can get that out tax-free personally. That would be from half the capital gains usually. If you want to move out the whole amount, then half is tax-free via the CDA, and half is ineligible dividend (half of ~50% = 25% tax).
I hope that clarifies what you are asking. The corp tax system involves some mental gymnastics.
“If you have a positive CDA from realizing capital gains in the corp, then you can get that out tax-free personally. That would be from half the capital gains usually. If you want to move out the whole amount, then half is tax-free via the CDA, and half is ineligible dividend (half of ~50% = 25% tax).“
So is it ever better if you sell a stock with large cap gain and to just leave it in the Corp ? Seems like half tax free is always the bettter way to go ?
Definitely! That is the idea behind capital gains harvesting. I have done it many times. Sell a stock with a big gain. Re-buy it. The gain gets booked, you pay little capital gains tax in the corp but can also give out a tax-free capital dividend instead of a highly-taxed ineligible dividend. I pay out the dividend from cash from my operating business and leave my investments invested.
The main drawbacks are that you need some big capital gains to build the CDA with, time to have your accountant do the dividend election (it is a formal submission), and the dividend needs to be big enough to offset the accountant fees. We tend to do a capital dividend when we have more than about $30K in our CDA because our accountant only charges us a couple hundred bucks for the election paperwork.
The whole notion that you should delay realizing capital gains is a bit different for a corporation that you are taking money from to live on. In a personal account, delaying gains or harvesting losses helps tax-deferral. In a corp, harvesting gains can strategically help move money out tax-efficiently to use personally. In addition to the article I wrote about it, Justin Bender also wrote about it.
Can you confirm this for me. Once you trigger a capital gain you can use the capital gain harvesting feature even years later to get money out of the Corp. it doesn’t have to be done immediately with the gained cash. Could be done with earned cash 3 years later ? Is this correct
Hey Joe. That is correct. Personally, I like to move it out when my CDA gets more than ~40K and then invest it personally (in a tax-efficient way). However, you need to have some cash from other operations laying around to do that.
I echo what cowtown cutter says. So much good info here that needs to be digested slowly. Thanks for putting this all in one place. I will refer to it again and again. I’ve had this post sitting open on my laptop for weeks now as I work through it and try to digest.
I know I have these discussions with my accountant and at the time I think I am following them, only to realize two days later that I can’t seem to retain any of what we discussed! I comfort myself with the knowledge that if I tried to teach my accountant how to do what I do by spending a few minutes explaining it to them a few times per year, they wouldn’t be very good at that either.
I don’t know where you find the time to have such a good grasp on all of this.
Honestly, it has taken me five years to distill things to where I have them now. Plus, writing these posts helps me too. I come back to them also 😉 For me, the key is have an awareness of the big basics to flag when I need to stop and look something up and where to find it.
Great article, really looking forward to the real-life examples! Got a question for ya.
Say someone’s got a lot of nRDTOH that’s trapped as per tax-brackets in their province and they’re a low spender-high saver. They have an expense-shock coming up in a few months, say june, and their corp year-end is end-april.
Would it be better to take a shareholder loan (of about 50k), and stagger the repayment more optimally (tax-bracket wise) by spreading the increased personnal income over 2024-2025 or to reduce the trapped nRDTOH by just taking more ineligible dividends right away and swallowing the personnal tax hit from ineligible dividends in higher brackets, assuming the majority would be pushed into the higher marginal tax rate by the move?
What factors would help decide the optimal move in such a situation?
Here is how I would look at it. The RDTOH is trapped until released. The opportunity cost would be how much you could have made on that refunded money by investing it earlier. No one can predict the market advances, but let’s say it is 8%/yr on average which is 0.67%/month. That investment income (probably a mix of capital gain and income) is subject to tax. So, let’s say 0.5%/month investment return after tax.
Let’s say you paid $25K now and $25K shareholder loan repaid in Jan (you could spread it more, but I am trying to make it simpler). That would get half the RDTOH refunded with this corp tax filing and halft to the next corp tax filing 12 months later (and put you in January and a new personal tax year), then that would be 6% after-tax investment return opportunity cost on that second $25K. Highly variable depending on what the market does. If taking the extra $25K early to get all of the RDTOH refunded results in a higher personal tax bracket bump (>6%) on that $25K, then it probably makes sense to spread out the income to save personal tax. With that amount of money, I think it is likely close either way and markets are unpredictable. For a really big draw (say $100K), the tax bracket bump would likely be higher than the opportunity cost for most people normally living in the lower or middle tax brackets. Does that make sense? Would be a good question for an accountant since your personal tax bracket really plays into it.
I have indeed submitted the question to an but I like to have them confirm my decision rather than make it for me. In this case I understand it’ll come down to the fine math of the two alternatives, so I’ll leave that part to them.
Thank for your insight on how to view the problem, appreciate it!
Absolutely! That’s how I roll too. Makes for better outcomes.