Disclaimer: I am an AI language model, not a tax professional. It’s important to consult with a qualified accountant or tax advisor for specific advice regarding your situation. That being said, I can provide you with some general information on how to take money out of a company without paying tax in Canada.
Taking money out of a company without paying taxes can be a complex task, as the Canadian tax system aims to ensure that individuals and businesses pay their fair share of taxes. However, there are legal strategies and options available that may help you minimize your tax liability. Here are some common methods for taking money out of a company without incurring significant tax obligations:
1. Salary and Bonuses: Pay yourself a reasonable salary or bonuses for the services you provide to the company. This is a common way to extract money, but it is subject to payroll taxes and is not a tax-free method. You would need to withhold and remit the necessary deductions (income tax, Canada Pension Plan (CPP), and Employment Insurance (EI)).
2. Dividends: If you own shares in the company, you can receive dividends as a shareholder. Dividends are taxed at a lower rate than employment income. However, keep in mind that dividends are subject to tax at the corporate level before they can be distributed to shareholders. The company must have sufficient retained earnings and meet certain criteria to pay dividends legally.
3. Capital Dividends: In certain situations, a capital dividend may be available if the company has realized capital gains on the disposition of eligible properties. Capital dividends are generally tax-free for shareholders and do not reduce the cost base of the shares, resulting in potential tax savings.
4. Shareholder Loans: Instead of taking money out as salary or dividends, you can choose to borrow money from your corporation. Shareholder loans can be a tax-efficient way to access funds. However, you must ensure that the loan is properly structured, and interest charges must be reasonable to avoid the application of the Income Tax Act’s “attribution rules.”
5. Capital Gain Exemption: If you have qualified small business corporation shares, you may be eligible for the lifetime capital gains exemption (LCGE). The LCGE allows you to sell qualifying shares and exclude up to a certain amount (currently $883,384 in 2021) of capital gains from taxation. This can be an effective way to extract funds from the company while reducing or eliminating tax liabilities.
6. Employee Benefits: Consider providing tax-effective employee benefits instead of taking cash out directly. For example, the company could pay for your health and dental insurance premiums, contribute to an RRSP or pension plan, or provide you with a company car. These benefits can be deductible for the company, creating tax advantages for you.
7. Family Income Splitting: If some family members are shareholders or employees of the company, you may be able to reduce the overall tax burden by distributing income among family members in lower tax brackets. However, it’s important to ensure that such income splitting arrangements comply with the tax rules to avoid income attribution or tax evasion issues.
8. Capital Withdrawal: If you plan to wind down your business, you can consider selling the assets of the company and withdrawing the proceeds as a capital distribution. This could result in capital gains that may be eligible for the LCGE, as mentioned earlier. It’s crucial to review the specific circumstances and consult with a tax professional to determine the best strategy.
Remember that the Canada Revenue Agency (CRA) closely monitors transactions and may challenge arrangements that are seen as tax avoidance. It’s important to maintain proper documentation, follow tax rules, and consult with a tax professional to ensure compliance.
In conclusion, the strategies mentioned above may help you take money out of a company without paying substantial taxes in Canada. However, each situation is unique, and tax planning should be tailored to individual circumstances. To minimize tax liabilities and comply with tax laws, it is strongly recommended to consult with a qualified tax advisor or accountant specializing in Canadian tax laws.