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What to do with surplus cash
If you have extra cash in your corporation, your first instinct may be to find a way to withdraw this money, while paying as little tax as possible.
But first, it’s a good idea to determine if you will have a business need for this money over the next one or two years.
Consider all the possible business uses you could have for this money. Your profits may fluctuate considerably from one year to the next, and this year’s profits may be needed when cash flow is tight next year.
You may also need to pay income tax or GST installments, or pay down corporate debt. Possibly, you may need to upgrade your equipment or premises.
If you need the profits for business purposes, invest the money until you need it.
If you don’t have a business need for your profits, consider whether or not you have a personal need, such as funding lifestyle expenses, making a major purchase or paying personal income tax. If you decide that there’s a personal need, the next step is to determine the best way to withdraw the money, paying special consideration to the tax consequences.
Reimburse business expenses paid personally – Just like any employee, your company can reimburse you for business expenses. You do not pay income tax and your company gets a tax deduction.
Repay any shareholder loan balance outstanding – If you have loaned your business money, you can repay yourself without any tax consequences.
Draw a higher salary – The company gets a deduction, but you are taxed personally. This may make sense if the company is taxed at a higher rate, as opposed to the lower small business deduction rate.
Pay a taxable dividend or a tax-free capital dividend from the corporation’s capital dividend account.
Pay a tax-free amount by reducing the Paid Up Capital (PUC) of shares – The PUC is the tax-paid value of your company shares. If the PUC is high, your company could pay you a tax-free amount, and reduce the PUC by that amount.
Reducing your PUC can be quite complex in order to avoid adverse tax consequences, so you should consult with a professional tax advisor to determine if this strategy is appropriate for you.
If you do not have either a business or personal need for the cash, then your next step is to determine whether or not you should still withdraw the money for other purposes, such as retirement or estate planning.
You can potentially boost your retirement income by establishing a retirement compensation arrangement or individual pension plan using corporate funds. You can also boost the value of your estate using strategies featuring tax-sheltered growth and tax-free payouts.
Kirbey Lockart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.