Dividends To Maximize Your Corporate & Personal Cash Flow

In the last couple of posts, I discussed the basics of how money moves and is stored in a corporation. How to use a corporation to smooth income and reduce taxes by staying in lower personal tax brackets. The different corporate account types that hold your money. Real accounts for operating and investing, plus the notional accounts that you can turn into real money from the tax refunds and deductions. Now that you know where the money is, you must learn how to balance releasing it using dividends against the personal tax on dividends. In this post, learn about when and how to pay yourself dividends tax efficiently from your corporation.

Balancing The Big Picture

You must balance a number of factors when considering when and how to pay dividends out of your corporation. Tax Deferral. Tax Integration. Inflation. Income-splitting. Personal Tax Shelters. It sounds complicated, but don’t worry. It actually boils down to a pretty straightforward strategy. This post and the next one provide the basis for that, and I will unpack each of those big principles.

Also, I have made a corporate income dispensing calculator that uses an algorithm to optimize salary and dividends, along with a video on how to use it. These posts are meant to explain how the algorithm works and why I built it the way that I did.

Maximize Corporate & Personal Tax Deferral


Consider both corporate & personal taxes.

You want a strategy that minimizes the combined total of personal and corporate tax in the current year. Less tax now means more capital to invest and grow. That is tax deferral. The main advantage of a corporation is tax deferral. Surprisingly, sometimes you actually defer more tax by taking the money now and releasing tax refunds, like RDTOH. However, to release that RDTOH, you must pay yourself dividends that are subject to personal tax. So, it is the net of the corporate tax refund minus the personal taxes paid that is indicative of tax deferral. Not just corporate or personal taxes in isolation – both.

dividend strategy

The “keep it all in the corp” advice is not always the best advice. When you consider both the corporate and personal taxes, sometimes taking more money out of the corporation in the current year than you need may maximize tax deferral. Look at the above example. If you were in the bottom personal tax bracket and did not pay out a dividend, then you would have missed out on a net of $2328 more money to invest.

In contrast, you would have paid more net corporate and personal tax by taking a dividend in the top personal bracket. If you required that dividend to live on, it would still make sense to take it. At least your corp gets a refund to blunt the tax bill. However, you would otherwise want to keep the money in the corporation to get the most tax deferral. That is when “keep it in the corp” does make sense.


nRDTOH & Personal Income Break Points

The top and bottom tax brackets are the extremes. There is a breakpoint for each province above which the personal tax exceeds the corporate refund. Above that taxable income, it makes sense to leave money in the corporation rather than pay out dividends if you do not need the money.

Even though the corporation receives a refund, that money still has a tax liability baked into it. You will eventually pay additional personal tax to get that refunded money out of the corporation as a dividend. If you apply the personal tax on non-eligible dividends to move that money out, it does not make sense to give extra dividends just to release the RDTOH and pay it out unless in much lower tax brackets.

It is “trapped” until you do need the personal money. When you do eventually need the money personally, then it makes sense to use a dividend at that time. You need the money and taxes are secondary. Even in a low tax bracket below the ones in the above chart, whether to pay out extra dividends just to release the trapped RDTOH also depends on a couple of other variables. Largely how efficient the ongoing investment growth in the corp is going to be vs how you deploy the money personally.

For example, taking extra dividends to release RDTOH and putting the extra personal cash into a TFSA or RRSP almost always makes sense. In contrast, taking extra money out of the corporation to invest personally in the top tax bracket may or may not. If the corporation is going to have worsening efficiency due to “too much passive income” it might. If the RDTOH trapping was a one-off and can be moved out slowly over time, then it may not.


eRDTOH & Personal Income Break Points

The same principle applies to eligible dividends and eRDTOH. However, the net personal tax rate for eligible dividends is lower due to the enhanced dividend tax credit for eligible dividends. So, it may make sense to pay out enough eligible dividends to release any eRDTOH balance more often. The personal tax rate on eligible dividends exceeds the 38.33% refund above the taxable income levels below.

Again, that refunded money must still be moved out into personal hands. If doing so as non-eligible dividends, then the total taxes are higher for paying extra unneeded dividends for incomes above the levels below. The eRDTOH is trapped until you do need the income.

The main advantage of a corporation is tax deferral and sometimes you defer more tax by taking the money now and releasing tax refunds, like RDTOH. Further, the tax on investment income in a corporation (tax integration) does not usually favor a corporation compared to earning the investment income directly. So, if you can get money out of the corporation efficiently now, and then invest it personally with less tax drag long-term, then you win. More on that later. First, let’s drill deeper into which types of dividends to pay first to maximize the tax deferral.

Empty Your Most Valuable Notional Accounts First

Your corporation’s notional accounts track money that can be refunded to your corporation, like the RDTOH example above. Other notional accounts, like the capital dividend account (CDA) and general rate income pool (GRIP) accounts track your corporation’s ability to pay out dividends at lower personal tax rates.

The CDA allows a corporation to give tax-free capital dividends due to having realized capital gains on its investments. The GRIP account tracks a corporation’s ability to pay out eligible dividends. Eligible dividends come with a higher personal tax credit to compensate for a higher corporate income tax rate that was already paid.

To move money out of your corporation at the lowest possible combined corporate and personal tax rate, you must understand where these notional accounts fit in compared to RDTOH and salary. That way, you can empty your most valuable accounts first to get the most overall tax deferral. The importance of that is magnified by the fact that inflation will erode their tax-saving powers.


Do not let the “inflation monster” eat your notional accounts.

corporation dividend strategy

Your corporate notional accounts are all priced in nominal dollars. That means if you let them sit, their buying power when you do get the money released is less.

Different notional accounts are more valuable than others based on how much tax savings they represent. So, you’ll want to pay attention to getting them emptied as soon as possible.

The prioritization of which accounts to empty first is affected by how much the buying power is eroding due to inflation vs how much of a tax hit is required to release it. Fortunately, those factors are usually aligned with how to get the lowest current tax bill anyway.


The most valuable accounts erode the fastest.

The capital dividend account is the most valuable because it permits a tax-free dividend. So, if I wanted to spend $10K personally, then a $10K capital dividend would do the trick. If I let that money sit in my corporation’s CDA for ten years at 3% annual inflation, it would be able to fund $7664 of personal consumption in inflation-adjusted (real) dollars. I would have to pay myself more ineligible dividends (plus the personal income taxes) to make up the difference. At the top personal rate in Ontario, I would need a $4470 ineligible dividend to have the $2336 after-tax required to make up for the inflation-monster munching on my CDA.

The next most valuable account is the eRDTOH because it gives a 38.33% refund and the eligible dividend gets a juicy enhanced dividend tax credit. This is followed by the nRDTOH which also represents refundable corporate tax. However, the personal dividend tax credit for the ineligible dividends required is much less than for eligible dividends.

GRIP generated from corporate income taxed at the higher general corporate tax rate, instead of the small business rate is the least valuable notional account. It allows you to save the difference between the personal tax rate on eligible dividends vs ineligible dividends. That is usually ~8-10% personal tax savings, depending on the province and tax bracket.


Move the money out now or pay more later for the same buying power.

You can see this visually in the chart below. More dividends are required to fund spending from GRIP than nRDTOH and eRDTOH, and much more than using a capital dividend. The steeper slope of the green line shows that more dividends are rapidly needed as the CDA is eroded by inflation. Same with RDTOH, but to a lesser degree. The GRIP left from general corporate taxes erodes very slowly (a gentle slope).

cda rdtoh GRIP inflation

So, not only do the most valuable accounts offer the most tax-efficient way to move money out of your corporation. That power is also the most quickly to be lost to inflation. That makes for a strong argument to empty corporate notional accounts using the right mix of dividend types when personal cash is needed. Starting with the most valuable accounts first. The dilemma becomes more challenging if you do not need the personal cash and would be losing corporate tax deferral to personally invest the excess cash.

Tax Integration Favors Personal Investing


Tax Deferral On Lane Changes vs The Tax Drag Headwind

If you think of corporate and personal investing like a race, then the movement between the corporate and personal accounts is like doing a lane change. When the personal tax is less than the corporate refund from a dividend, then you accelerate a little on the lane change. If the combined tax is more, then the lane change slows you down a bit. We talked about when to change lanes in the preceding section on tax deferral. However, that is not all that matters in the race. What if one lane allows you to go faster than the other?

Tax on investment income is like a headwind that you must work against. That is why I call it tax drag. It is constantly blowing as the taxes on interest or dividend income are paid in the year it is earned. So, the question is which lane has the stronger headwind? Corporate or personal. The answer depends on your personal tax rate and how efficiently you keep your corporate investment income by using dividends. If you require dividends to live on that also release the RDTOH, a corporation can be as efficient as investing in a low personal tax bracket.

However, the money must come out eventually. That is like taking the off-ramp. Either when you liquidate the corporation or if you were simply flowing money through the corporation by paying dividends you don’t need. That is a question of whether tax integration of investment income favors corporations or individual investors. Spoiler alert: it is in the title of this section.


Can you make up for the lost corporate tax deferral in personal accounts?

Understanding that tax integration favors personal investment income may affect your strategy. If you can move money out of the corporation without losing ground due to lost tax deferral, then that presents an opportunity. If you can shelter it in a registered account, that is an easy win. It will have less tax drag there.

Where it becomes fuzzy is if you lose some tax deferral moving the money from the corporation to personal accounts. If the upfront tax deferral loss is minor and the personal tax rate is very low, then the low personal tax drag could make up for it in the long run. That is the idea behind building an investment account in a low-income spouse’s name as an intermediate-term income-splitting strategy. In contrast, at high personal income tax levels, it is very hard to make up for lost corporate tax deferral in a regular investing time frame using conventional investments. Especially if the corporation is paying out dividends to live on that are enough to keep the RDTOH flowing efficiently.

If the corporation becomes inefficient, that changes the math. If there is money trapped in notional accounts because you don’t need the personal cash, then the corporate investing lane slows down to a rate similar to the highest personal tax bracket. Decompressing strategically in advance of that can help (using registered accounts or possibly a low-income taxable account). Other strategies could be to use corporate-class ETFs to keep investment income down, asset location to shift income to tax shelters, or adjust your personal spending upwards.


Balancing Corporate Tax Deferral With Personal Tax Shelters

Registered accounts have no Canadian income tax on investment income, making them like the speed lane. That can often make up for the loss of tax deferral when they are used well.

An RRSP offers 100% tax deferral and tax-sheltered growth. That is a good option if you have emptied out your corporate notional accounts and still require more money to live on. A salary is tax-efficient from a tax integration standpoint and generates RRSP room as a nice side effect. Salary also keeps the door open to using an individual pension plan (IPP) mid-career, if that suits you.

If you do not need the salary to live on, then paying out excess salary just to get more RRSP room usually does not make sense. Salary only generates RRSP room at a rate of 18%. So, you would lose a lot of tax deferral if you were just paying the salary for more RRSP room and not to live on. You can’t make that up with realistic assumptions. I made a simulator to test that hypothesis. Ben Felix and Braden Warwick also did a similar analysis using RRSPs and IPPs with a high corporate income and different personal consumption levels. Same conclusion. A dynamic strategy to empty notional accounts plus enough salary (with RRSP/IPP usage) to make up shortfalls wins.

A TFSA requires personal after-tax money. That may mean some loss of corporate tax deferral, but it then grows tax-free. Using a TFSA in addition to a corporation can come out ahead in the long run. That does require investing for growth and a longer time frame (like >10 years) to make up for the upfront tax hit.

Algorithm to Pay Yourself From a Corporation

There are actually many nuances to the optimal salary and dividend mix for moving money out of a corporation. The starting point is how much money you need in your personal hands to spend. However, if you have balances in your corporation notional accounts, then paying the right mix of dividends to start draining that money is where to begin. Plan how to do that sequentially, releasing money from the most valuable accounts first.

An exception to that may be with the GRIP account. For a business with access to the SBD, if there is a lower-income spouse who can get a salary at a lower marginal rate than dispensing eligible dividends, then some salary may be better than fully emptying GRIP. The main limiter is that salaries must be at market rate. A corporation that cannot access the SBD will grow a lot of GRIP regardless. Tax integration generally favors salary, and in that case, salary may be optimal after the valuable CDA and RDTOH accounts have been emptied.

Do not let your potential buying power sit in your CDA and RDTOH accounts for the inflation monster to feast on. It is vital to understand the basics of this to discuss it with your accountant. I have met several people now with literally millions in their CDA eroding away while they pay themselves salaries and ineligible dividends. It is costing them >$50K/yr in lost buying power. Understand and advocate for yourself.

This is summarized in the algorithm below and expanded upon in the subsequent text. With all of the nuances, remember that this would be a point for discussion with your accountant. It is not specific advice.

salary vs dividend corporation

Empty the CDA. ASAP.

The priority would be to empty the CDA account first, using a capital dividend. Your accountant must confirm the CDA balance and file a special election to do that. That could mean accounting fees. So, even though there is some erosion due to inflation, you would want to be giving a large enough capital dividend to justify the fees.

If I had minimal fees, then even a $5-10K capital dividend could be worth it. In contrast, if my accountant wanted to charge me $500 to $1000 for a capital dividend election, I would wait until I had more. This applies even if you do not personally need the money right now. The excess could be saved or invested personally. Remember that tax integration favors personal investing. If you have unused TFSA or RRSP room, even more so.

If you are planning a big personal splurge or want to build a personal account in a low-income spouse’s hands, then a capital gain harvest could be used to juice your CDA. Remember that tax integration favors personal investing. This can be an efficient lane change into a faster lane.


Empty the eRDTOH and nRDTOH up to the breakpoint. Maybe.

In practice, I would use trapped RDTOH as a flag to look at my long-term financial plan. That may require some modeling about your current vs future consumption and how large your corporation is going to get. As discussed above there are many variables involved. However, if you have under-used tax-sheltered accounts, this may be an opportunity to tax-efficiently get money out of the corporation and into them. Similarly with a low-income spouse investing.

If the corporation is going to progressively have more RDTOH trapping over time, then that is often a symptom of a very large corporation with very little personal spending. You could consider how to better smooth your consumption over your lifespan and also what your estate planning and charitable giving goals are. If the trapped RDTOH is due to a one-off event, like a large realized capital gain, then draining it slowly over time may make the most sense.

This type of planning may be one of the cases where working with a financial advisor provides really good value.


You may need to hold onto your GRIP for longer.

If your corporation has excess GRIP from taxes at the general corporate tax rate, then it is the least valuable of the notional accounts. Still, your corp has already paid the higher tax and if you need the money, then paying eligible dividends using the GRIP balance is the cheapest way that you have left. Usually.

Paying a lower-income spouse a salary for corporate work could be more tax efficient if their tax rate is lower than your eligible dividend tax rate. This could happen with a high-income corporation that has a lot of passive income. If you can income-split using dividends, then using the GRIP to split eligible dividends is still the best route.

Tax integration generally favors salary and with a corporation that does not have access to the SBD, even more so. In that situation, GRIP will accrue no matter what, and a salary may decrease that. In that case, salary may be more efficient over time.

If you do not need the personal cash, then paying out excess dividends just to empty the GRIP results in personal tax. That loss of corporate tax deferral is almost impossible to make up for with reasonable assumptions.


Salary to fill the gap.

If you spend a lot or have a comparatively small investment portfolio, then you will likely be able to empty your notional accounts and still have a shortfall for your personal cash requirement. That leaves the option of either paying salary or ineligible dividends (with no nRDTOH refund). Tax integration usually favors paying salary and I will explore why and how to optimally use a salary in the next post.

11 comments

  1. Good summary of a topic that is not straightforward. You may have mentioned it, but one reason to clear the notional accounts is to keep investment income down. More investment income can mean greater loss of the small business deduction.

    1. Thanks Park. I don’t think I explicitly mentioned that, but it is an excellent point. By efficiently changing lanes to invest outside of the corp, the associated future investment income grows outside the corp. That decompression helps prevent worsening taxes from what I have coined corporate bloat (passive income limits and trapped RDTOH from too much income). The money needs to come out of the corp and taxes paid sometime – best to strategically decompress when you can.
      -LD

  2. Mark, very nice and clear explanation. One thing I can’t figure out, so must be missing something – I get that you should empty the refundable dividend notional accounts (when indicated) as you are losing to inflation if you don’t because the money is not in your account until it is refunded. But with the CDA account, the money is there as a result of having crystallized a capital gain. So it is invested and growing, not just sitting in cash. So putting aside the separate consideration that your tax rate on the personal side may be less than the tax rate you’d pay in the Corp (more efficient investing in the personal side), how is leaving money in the CDA allowing it be be eaten by inflation?

    1. Hey Grant.

      What I think the real problem is is not that you have balance in the CDA, it is that you are keeping it while paying yourself more highly taxed money instead. For example, why pay your yourself eligible or ineligible dividends or salary to live on when you could give yourself a tax-free dividend? It is the most tax-deferral since there is no tax. Why wait? You have nothing to gain. There is cash somewhere in your corporation to pay out compensation to cover your living expenses. You can pay the capital dividend out of your operational account (and keep your investments invested) instead of other forms of compensation. Perhaps thinking of operational and investing money separately is where the confusion comes from. It was for me until I spent more time on it and started using some big capital dividends with regularity now that my portfolio is larger and I donate appreciated securities regularly (getting double the CDA).

      So, I would empty my CDA first (as long as the accountant fees aren’t crazy) rather than pay out other income. I usually pay my capital dividends from my operational account. I can then reduce the amount of regular dividends or salary that I pay that year, spend more (I usually do!), or invest the excess in a personal account (my wife usually does). The longer I let it sit, the more I would need to give of taxable dividends/salary to get the same buying-power (after dividend/salary tax). If it is more money than I need, then investing it in a personal account has less tax drag than a corp anyway and also keeps the passive income in the corp lower over time.

      Mark

      1. Yes, of course, thanks. I’m so used to thinking of taking out enough salary to max out my RRSP to cover spending needs, I didn’t think of reducing salary and making up the difference with a CD, which is, of course, more tax efficient. Sort of another example of the behavioural error of compartmentalizing money, rather than regarding money as being fungible. So I’ll do that next Corp year end to minimize accounting fees.

          1. there is that behavioural benefit of compartmentalization…which depending on your personal tendencies, could far outstrip maximizing on efficiencies…

  3. what would be considered a “high” accountant cost to distributing the CDA. Based on the graph. A rough 10% decrease in value seems to occur within ~2-3years.

    So would setting that as a rough guidemark make sense? if Accountant fees >3-10% of CDA distribution?

    1. Hey Steve,

      That is an excellent question. I have tried to come up with a rule of thumb, but I haven’t. The deterioration from inflation is one issue. A second issue is that if you need the money and would be paying higher taxed income instead, then there is that tax savings on top of it. Together, that would make my threshold pretty low. If I didn’t need the money, it might be higher (but I can always find a use for personal cash or my wife invests it).

      The fee would depend on complexity, but from what I have seen should be small for a straightforward CDA election. I have seen it range from included in the corp tax filing costs to ~$500. The most I have heard of was $1-2K, but that may have been due to a messy situation to clean up. That is just my limited experience from personal plus those who chat with me about their experience.
      -LD

  4. Please correct me if I’m wrong. Utilizing the CDA requires selling securities to generate a capital gain. If one is in the accumulation phase (buying/rebalancing with time), and does not attempt to time the markets, then selling a security to trigger a gain and pay a tax-favoured CDA-dividend would be analogous to the tax-tail wagging the investment-dog, would it not ?

    1. Hey Jamie,
      Not really. If you have some corporate earnings that you plan to pay yourself from, it is simply the difference between paying yourself a regular taxable dividend vs a capital dividend.

      Example, I have 50k in my corp bank account. I don’t want to invest it because I am going to pay myself from that to live. I realize a 100K cap gain in my corp investment account and rebuy the security. So, no difference in my corp investments. I could give a 50K capital dividend from the bank account instead of a taxed one. There would be 25K corp tax (10K net of RDTOH if you also paid some non-eligible dividends during the fiscal year to release).

      I wrote more about it here https://www.looniedoctor.ca/2020/09/19/capital-gains-harvest-corporation/
      -LD

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