How Much to Pay Yourself From Your Corporation

How much should I pay myself from my corporation this year?

Take enough to cover your spending and personal tax, then test any extra payment against your other income.

This comparison assumes you are resident in Canada when paid. If you live elsewhere, Canadian dividend withholding and tax where you live can change the answer; get a cross-border review before declaring a dividend.

Gather your personal return, expected income, spending budget, corporate profit and cash balance; reconcile prior draws. Salary or dividends changes the calculation. Salary brings source deductions and employer contributions under CRA rules and, in Quebec, Revenu Québec rules. Directors can personally owe unremitted federal income-tax deductions under section 227.1; recovery proceedings must start within two years after the director last ceased to be a director. Quebec has separate director liability rules.

What does topping up to a tax bracket mean for my pay?

Topping up means considering an extra payment up to a taxable-income bracket edge. Subtract projected taxable income before the extra payment from the next federal and provincial edges; the smaller gap is the first edge you reach. A higher rate applies only above its edge.

Use the full brackets for your year-end province; Quebec residents need Revenu Québec's brackets too. For an other-than-eligible dividend, divide remaining taxable-income room by 115% to estimate the cash dividend (CRA). Salary enters differently. Test tax and benefits before paying; dividend tax rates by province covers types and credits.

If you receive the Canada child benefit, the dividend's grossed-up amount can raise the family income used for the next benefit year. Include that effect in the top-up decision.

Dividends paid to a spouse or child can face tax on split income despite a lower bracket; see Paying family members for exceptions.

How is profit I leave in the corporation taxed now and later?

An eligible Canadian-controlled private corporation pays tax on active business profit even if it leaves every dollar in its bank account. The federal small business rate is 9% on eligible income within the $500,000 federal business limit, plus provincial tax; B.C.'s lower corporate rate is 2% (CRA rates; B.C. rates). The limit can be shared with associated corporations or reduced under section 125.

When the corporation later pays a taxable dividend, you report it on your personal return and may claim a dividend tax credit (CRA). Retained earnings are not cash. Check unpaid tax, debts and the cash forecast before declaring a dividend. A controlling owner receiving a dividend can also owe the corporation's income tax for that year or earlier years under section 160, up to the lesser of the dividend and tax debt; CRA can assess at any time.

Does leaving profit inside save tax or only delay it?

Leaving active business profit inside mainly delays the owner's personal tax. Corporate tax is due on that profit now; dividend tax generally comes when the corporation distributes its after-tax earnings. The dividend gross-up and credit aim to bring total corporate and personal tax near direct personal taxation, but the result is not identical in every province or year (Department of Finance).

Deferral can leave more after-corporate-tax cash in the company for business needs. It is not a guaranteed final saving: future personal rates, dividend type, other income, benefit repayments, and the tax on returns from investing retained cash can change the result. If the corporation needs capital soon, withdrawing it merely to fill a bracket may be costly. Holding and investment corporations handles where to invest corporate cash.

Should I take built-up retained earnings over several years or at once?

Spreading dividends can reduce the amount that lands in higher personal brackets in a single year, but only if later years actually have room and the rules remain favourable. Model each year's other income, expected cash needs, province, dividend type and available corporate cash rather than dividing retained earnings mechanically (CRA brackets).

Multi-year withdrawals from a corporation warrant a corporate tax review before a large dividend is declared.

When does money left inside start to cost the small business rate?

The balance left inside does not itself trigger the passive-income reduction. For a corporate tax year ending this calendar year, total the corporation's and associated corporations' adjusted aggregate investment income from tax years ending in the preceding calendar year. Above $50,000, the federal business limit starts shrinking; by $150,000, this reduction can eliminate it (Income Tax Act, section 125).

That measure is investment income, not the principal invested or total retained earnings. Interest, some taxable capital gains and other property income may count; active business cash held for expenses does not count merely because it sits in the corporation. Investment income itself generally does not receive the small business rate (CRA T2 guide).

Retained earnings can also increase taxable capital. A separate test reduces the federal business limit when prior-year taxable capital employed in Canada exceeds $10 million for the corporation and associated companies; at $50 million, it eliminates the limit (Income Tax Act, sections 125 and 181.2). Review associated companies before assuming the limit is untouched. For investment structure choices, see Holding and investment corporations.

What if I need more cash than I pay myself?

Reconcile extra draws when they happen. Money beyond declared salary or dividends may be a taxable shareholder loan or benefit; a book entry does not establish a loan. A real loan repaid within one year after the end of the corporation's tax year in which the loan was made may avoid income inclusion if repayment is not part of a series (section 15(2.6)). Shareholder loans explains the conditions and any interest benefit.

Example

Illustrative Canadian dollars; other taxes, credits and costs omitted.

B.C. profit and a current cash need

A B.C. corporation has C$200,000 of taxable active business profit before paying its owner. Assuming the full small business limit is available, federal and B.C. corporate tax totals C$22,000, leaving C$178,000. If C$90,000 is the owner's gross dividend target, paying it leaves C$88,000 for operations or later distribution; paying all C$178,000 now puts more income on this year's return. If the owner needs C$90,000 after personal tax, calculate a larger dividend and reduce the retained balance accordingly. Investment income from retained cash could later reduce the small business limit.

C$400,000 of retained cash

A B.C. owner has C$400,000 of after-corporate-tax cash available. One C$400,000 other-than-eligible dividend produces C$460,000 of reported taxable dividend income before other items, reaching the top federal and B.C. brackets. Once both top brackets apply, each further C$1 of dividend creates about C$0.49 of income tax after dividend credits, before other effects (CRA rates; federal credit; B.C. credit). Eight C$50,000 annual dividends may keep more income in lower brackets if the owner has little other income each year. Future rates, benefits and investment returns can change which schedule costs less.

Draws exceed declared pay

An owner declares C$40,000 of pay but withdraws C$80,000. The extra C$40,000 needs a documented explanation. If the owner actually owes the corporation that amount, shareholder-loan rules may apply. A bookkeeping entry alone does not establish a loan; without a real debt, the withdrawal may be a taxable shareholder benefit (CRA). Reconcile the dates and entries in Shareholder loans.

Different for you?

• You are choosing the type of pay: compare Salary or dividends and, if retirement room matters, Salary for RRSP room and CPP.
• You need the tax on a specific dividend: use Dividend tax rates by province.
• You are investing a large cash balance or considering a holding company: see Holding and investment corporations.
• Your draws exceed declared pay: review Shareholder loans promptly.
• You plan to empty or close the company: follow Closing a corporation.
• Several years of withdrawals, associated companies or changing residence are involved: take your personal returns, corporate financial statements, shareholder account and cash forecast to a corporate tax review.