You have worked hard to build your business and create a profitable business. During the first few years, you may have stopped paying to reinvest in your business and grow your business. Now you may be at a point where your business has consolidated, and you are ready to start reaping some of the profits from your business. These ways are essential to understand when employing services like small business accounting. This article discusses some of the more general approaches that business owners can use to withdraw money from a business tax-efficient way.
Reward yourself and your family
Business owners will usually pay their wages similarly to rewarding an employee. If family members work in the company, they can receive a reasonable wage (or salary). This is especially beneficial if family members have little or no other source of income. In this case, a “reasonable” wage would be close to what an unrelated third party would be paid for the same job.
Paying taxable dividends
Dividends can be used to distribute corporate money to you and your family members (this, however, does not reduce corporate tax). This would require that you, your spouse, and your children own shares in your company directly or indirectly (for example, through a trust or holding company). To ensure this is a tax-efficient method of withdrawing money from a company, it will be important to consider the Distributed Income Tax (TOSI) rules and the company attribution rules before any distributions occur.
Convert “hard ACB” to cash
If you bought your business from someone else, the stock you have acquired might have a “hard” adjusted cost base (ACB), which may become relevant when planning to withdraw cash from your business. “Hard ACB” is basically a tax term representing the amount you paid for the shares when you bought them. They can potentially be converted into cash (or debt that can be repaid later) through a holding company, allowing you to access the capital you have invested, without taxes.
Repay existing shareholder loans
To help finance the startup or growth of your business, you can lend funds to your business in the form of a shareholder loan. Now that your business is profitable, it may be a good time to consider whether the business will repay all or part of this loan. Any amount you receive upon liquidation of your shareholder loan will be a tax-free distribution, similar to a return of equity.
Pay a capital dividend
Another potential untaxed distribution that must be considered is the payment of a dividend from your company’s capital dividend account (CDA). Simply put, a CDA is a notional balance that most often represents a non-taxable portion (currently 50%) of any capital gains (or similar income) that a private company has made by managing capital assets (tangible and intangible).
Bottom Line
If you find yourself in a situation where withdrawing cash from your business is a matter of necessity or obvious, take the time to properly plan how to withdraw money from your business to ensure that you pay the minimum required amount of tax. However, as we have seen, there is no way to get money out of your business in a tax-efficient way.
If you need any advice on tax-saving strategies from an expert tax accountant in Toronto, Mississauga, Oakville, and Hamilton feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.
Frequently Asked Questions
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Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.