Must you depart company financial savings in your organization?

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Withdrawing money from a corporation to invest

One of the first things to identify here, Chris, is your goal behind withdrawing the money from your corporate bank account. If you want to invest it, you can open a corporate investment account and transfer the funds into it. This way, the money stays within the corporation, and it won’t be considered a taxable withdrawal. The personal tax that can be deferred by leaving corporate savings in a corporation can be more than 40%. This is a compelling reason to incorporate your business and to accumulate savings within it.

Given the potential investment income from a $1-million corporate investment account, I should mention that recently introduced corporate tax changes may impact the taxation of your business income after you invest the funds. 

As of 2018, if a Canadian-controlled private corporation (CCPC) earns more than $50,000 of adjusted aggregate investment income (AAII), its $500,000 federal small-business limit will be reduced. The small-business limit allows up to $500,000 of profit to be taxed at the 9% federal small-business tax rate instead of the 15% active business income tax rate. There are provincial or territorial taxes payable as well, and the provinces and territories have their own lower small-business and higher active business income tax rates that may be impacted by investment income earned. 

At the federal level, if your investment income exceeds $150,000 in a year, the full small-business limit is eliminated. 

If you have room in your registered retirement savings plan (RRSP), Chris, you could make a withdrawal from your corporation and more than offset the tax payable on that withdrawal by making an RRSP contribution. 

If you have room in your tax-free savings account (TFSA), it is probably advantageous to make withdrawals from your corporation to fund your TFSA. The upfront tax on your corporate withdrawals can be offset over time by the tax-free growth in your TFSA. 

Does your corporation have a CDA or RDTOH balance?

You should determine if your corporation has a capital dividend account (CDA) balance. That may not be the case if your $1 million of savings has come from business income alone, as a CDA balance can arise from capital gains realized by a corporation. Half of a capital gain gets added to the CDA balance, and a corporation can pay this amount out to a shareholder tax-free. 

You should also determine if your corporation has a refundable dividend tax on hand (RDTOH) balance. Again, this may not apply to you, Chris, as RDTOH accumulates when a corporation earns investment income. The corporation pays tax on that income, some of which is refundable in the future if taxable dividends are paid out to a shareholder. 

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