Retained Earnings for a Home Purchase: Dividend, Salary or Loan

What are my ways to get corporate cash for a home?

Four common routes move cash from a corporation to its owner, and each is taxed differently: repaying money you lent the corporation, a dividend, salary or a bonus, and a shareholder loan. Many owners combine them. Which mix costs least depends on your province, your other income and the corporation's tax history.

Retained earnings are an accounting total, not cash: the money must be in the corporation's bank account the day it leaves. Each route also needs its own record before the cash moves, such as a dividend resolution, a payroll run or a loan agreement, and the record has to match what actually happened, because the CRA decides whether an amount is a loan from the substance of what happened, not from how it was recorded (CRA shareholder loan folio, paragraph 1.14).

Reimbursing costs you paid for the corporation is a separate case; see business expenses paid personally. The shareholder account is the running balance between you and the corporation: in credit means it owes you (money you put in), in debit means you owe it (money you took out that was not pay or a dividend).

The case is not simple when the closing is close, the corporation holds several years of retained earnings, you want to mix a loan, a dividend and salary, the shareholder account is in debit, the corporation has lost money, a spouse co-buys, you or a co-buyer is a US citizen or owned a home abroad, or you live in Quebec. What to gather is under "What should I gather, and when do I need a professional?"

Is it worth withdrawing retained earnings to buy a first home in cash?

It depends, because the amount you take drives the tax. A dividend or salary is taxed to you in the year you receive it, and the federal rate rises with each bracket (CRA tax brackets), so paying the whole price in cash from the corporation puts the whole amount into one year's income. A deposit plus a mortgage, or withdrawals spread over earlier years, keeps each year's income lower but adds interest or time.

Start from the cash needed. The questions to settle, in whatever order: what the corporation owes you, whether a loan would be repaid in time, what your registered plans can cover, and how much has to be a dividend or salary. The tax cost of each depends on your province, other income and the corporation's tax pools.

How is a dividend taxed, and why must I withdraw more than I need?

A taxable dividend is taxed on a grossed-up amount, and no tax is withheld when it is paid, so the dividend has to be larger than the cash you want to keep. (A capital dividend is the exception, below.) You report 115% of the cash for a dividend other than an eligible dividend, or 138% for an eligible dividend. You then claim a federal dividend tax credit on line 40425 (CRA: line 12000). Your province or territory adds its own tax and credit, which this page does not read.

The corporation decides, and must notify you in writing at or before payment, whether a dividend is eligible. A Canadian-controlled private corporation can pay eligible dividends without extra corporate tax only up to its general rate income pool, which generally reflects income that has not had the small business deduction or another special tax rate. Ask which kind you will receive before you work out the tax (CRA: designation; CRA: GRIP).

A private corporation with a balance in its capital dividend account can instead elect to pay a capital dividend, which is not included in the income of a Canadian-resident shareholder (Income Tax Act, subsection 83(2); CRA capital dividends folio, paragraph 1.2). The corporation files Form T2054 with a directors' resolution by the earlier of the day the dividend becomes payable and the first day any part is paid, and an election above the account balance triggers a tax of 60% of the excess (same folio, paragraphs 1.11 and 1.19). Confirm the balance before you plan around it; for the choice against salary, see salary or dividends.

A dividend is not pay, so payroll deductions do not come off it. The tax shows up on your return for the year you receive it, with any balance due by April 30 of the next year (CRA: important dates). Instalments may also be required if your net tax owing is more than $3,000 ($1,800 in Quebec) in the current year and in either of the two years before (CRA: who pays instalments).

The dividend you receive is the cash. The tax is a separate bill on your return for that year, so decide the after-tax amount you want and work backwards: dividend = amount wanted ÷ (1 − your total tax rate on that dividend). The rate depends on your province and other income; see tax on dividends from your corporation. For the paperwork, see declaring and paying a dividend.

What happens if I take salary or a bonus?

Salary is employment income taxed through payroll, the corporation can deduct it if it is reasonable, and it builds RRSP room for the next year. The corporation deducts income tax and CPP from each payment (in Quebec, QPP applies instead of CPP, under Revenu Québec's rules), and EI where the work is insurable; employment of a person who controls more than 40% of the corporation's voting shares is not insurable. It must also contribute an amount equal to the CPP it deducts (CRA: Employers' Guide). A regular remitter sends the deductions and its share to the CRA by the 15th day of the month after payment (CRA: remittance due dates). The corporation therefore needs cash for the gross pay plus its own share; see salary for RRSP room and CPP. The Act allows a deduction for an expense only to the extent it is reasonable (Income Tax Act, section 67).

New RRSP room is 18% of the previous year's earned income, up to the annual dollar limit. Earned income is built from employment, business and certain rental and other income; dividends are not on that list. Salary paid this year therefore builds room for next year, and dividends build none (Income Tax Act, section 146; CRA: T4040).

Salary must actually go through payroll. A bookkeeping entry made after the money left does not turn a withdrawal into past salary; see paying yourself a salary after the fact. To compare salary and dividends in general, see salary or dividends.

Can my corporation lend me the money for a home (a shareholder loan)?

Yes, but the loan is added to your income for the year you receive it unless you repay it within one year after the end of the corporation's tax year in which the loan was made, and the repayment is not part of a series of loans and repayments. The clock runs from the end of the corporation's tax year in which the loan was made, so a loan made just after year-end gets almost two years and one made just before year-end about one. A loan to a person connected with you, meaning someone you do not deal with at arm's length or are affiliated with, falls under the same rule (Income Tax Act, subsections 15(2), 15(2.1) and 15(2.6)).

A loan buys time; it is not a way around tax. Repaying early and borrowing again, or repaying with a new loan, can count as a series and lose the exception; a dividend, salary or bonus applied against the loan generally does not (CRA shareholder loan folio, paragraphs 1.82 to 1.86). Check the corporation's year-end before you borrow, because it starts the clock. For the full rule, see shareholder loans.

A separate exception covers a loan to an employee, or to an employee's spouse or common-law partner, to acquire a dwelling to live in. It applies only if the loan was made because of employment and not because of shareholdings, and bona fide arrangements to repay within a reasonable time were made when the loan was made (Income Tax Act, subsection 15(2.4)). An owner should not assume it applies: the CRA's signs of a shareholding loan include that the corporation only lends to shareholders and that the borrower can significantly influence its decisions. The exception also does not cover a loan above the dwelling's cost, a refinancing (generally) or renovations (CRA shareholder loan folio, paragraphs 1.50 to 1.59).

If I borrow interest-free for a few months, what interest benefit do I report?

A loan with no interest still creates a taxable benefit for the time it is outstanding. If you received the loan because you are a shareholder, you are treated as receiving a benefit equal to interest at the CRA's prescribed rate for the period the loan was outstanding, less any interest you paid for the year by 30 days after the year ends (Income Tax Act, subsection 80.4(2); CRA interest benefit folio, paragraph 2.25).

The CRA publishes the prescribed rate by quarter, so check the CRA rate table for the quarters the loan ran. The corporation must file a T4A for the benefit (CRA interest benefit folio, paragraph 2.40).

Two points matter. The Act caps the interest on an employee's home purchase loan at the prescribed rate in effect when the loan was received, and resets it after five years if a balance remains. That cap and the Act's definition of a home purchase loan are both tied to the employment circumstances in subsection 80.4(1) (s. 80.4(4), (6) and (7)). The shareholder benefit under subsection 80.4(2) has no matching cap, but one line of the CRA's employer guide says the home-loan treatment also applies to a shareholder (T4130). Until the rate is confirmed for your loan, work the benefit at each quarter's rate. Which rule applies depends on whether the loan arose from employment or from shareholding (CRA shareholder loan folio, paragraph 1.60). If the whole loan is included in your income, the interest benefit does not also apply to it (Income Tax Act, paragraph 80.4(3)(b); CRA interest benefit folio, paragraph 2.15). For the rate rules and records, see interest on a shareholder loan.

Can I take money back first without a dividend?

Yes, if the corporation genuinely owes you money. Cash you lent the corporation earlier sits in your shareholder account as an amount it owes you, and repaying that principal settles a debt; it is not pay or a dividend. Match it to the original deposits and bank records before you rely on it. The CRA accepts set-off against a shareholder loan where it legally discharges the debt, judged by the contracts and the accounting records, and its worked example subtracts a loan the shareholder made to the corporation from the balance the shareholder owes it (CRA shareholder loan folio, paragraph 1.82 and example 7).

Check which way the account runs. If you owe the corporation, new withdrawals add to that balance, and the CRA applies repayments to the oldest loan first (CRA shareholder loan folio, paragraph 1.81). Money you paid in for shares is a different matter from a loan to the corporation and needs separate review. For how to read and keep the account, see the shareholder loan account.

Do the Home Buyers' Plan and an FHSA help?

Savings already in an RRSP or FHSA can cover part of the price and cut the cash you need from the corporation. Money not yet in a plan still has to leave the corporation by one of the routes above, and putting it in a plan does not make that withdrawal tax-free. What the plans add is a deduction going in and no tax on a qualifying withdrawal (an HBP withdrawal must be repaid). Each depends on being a first-time buyer. Both belong to the person who holds them, so a co-buyer has separate limits.

For the HBP, the first repayment year is the fifth year following the year of the first withdrawal for a first withdrawal made from January 1, 2022, to December 31, 2028, under the CRA's temporary relief. A year's required repayment you skip is added to your income. The home must be bought or built before October 1 of the year after the year of your first withdrawal. Sources: Income Tax Act, section 146.6, section 146.01, CRA: opening an FHSA; CRA: HBP, participating, withdrawing and repaying; CRA: FHSA, contributing and withdrawing.

Salary paid in one year builds RRSP room only for the next, so salary paid this year adds no room for a contribution this year, and a contribution made within 89 days before an HBP withdrawal may not be deductible. An FHSA does not wait on salary: its room comes from the plan's own rule, but it is still funded from your own cash. For how much salary builds how much room, see salary for RRSP room and CPP.

Will the corporation have enough left?

Every route needs cash in the bank, and a dividend must also pass a solvency test. Under the federal corporations Act, a corporation shall not declare or pay a dividend if there are reasonable grounds for believing it is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would be less than its liabilities and stated capital (Canada Business Corporations Act, section 42). A provincial corporation follows its own act, which this page does not read. If retained earnings are negative, see dividends with negative retained earnings.

Plan the cash left after the withdrawal as well: payroll remittances if you take salary, the corporation's own tax and any GST/HST it owes, and the loan receivable that stays on its books until repaid.

Unpaid corporate tax can follow the money. A shareholder who does not deal with the corporation at arm's length and receives a dividend for nothing in return is jointly liable for the corporation's income tax for that year and earlier years, up to the value received, and the CRA can assess it at any time (Income Tax Act, section 160). A director can separately be liable for payroll deductions the corporation failed to remit, and for unremitted GST/HST, subject to collection conditions and a due-diligence defence; proceedings must start within two years after the director last ceased to be a director for payroll, and the GST/HST assessment window is two years (Income Tax Act, section 227.1; Excise Tax Act, section 323). Check that the corporation's tax and remittances are current before the money goes to a deposit.

Will taking money out change what a lender counts as income?

A lender sets its own rules on which income counts and on how it checks where the deposit came from. A dividend or salary you take shows up on your return and on a T5 or T4 for the year you receive it. A loan that is not taxed does not appear as income at all. A lender may ask where the deposit came from, so keep the resolution, the slips and the bank trail. Ask the lender before you withdraw whether a one-time dividend counts as income and whether a loan from your own corporation counts as a debt you owe. For what lenders ask for, see proving income to a lender.

What should I gather, and when do I need a professional?

Gather this before you decide:

• The purchase agreement, and the deposit and closing dates.
• The corporation's bank balance, last year-end statements and year-end date, and its capital dividend account balance if it has one.
• The shareholder account ledger: what you put in and took out, with dates.
• Your pay and dividends so far this year, your latest notice of assessment for RRSP room, and your FHSA room.
• The prescribed rate for the quarter, if a loan is on the table.
• Whether a spouse or other co-buyer will take part, and whether they own shares.

A professional is worth having before the money leaves when:

• The closing is weeks away and the mix involves payroll or a dividend resolution.
• The account is in debit, or an earlier loan is still open, or a loan would cross a year-end.
• The corporation has lost money, or its retained earnings are negative.
• A spouse co-buys, owns shares or works for the corporation. A dividend paid to a spouse can fall under the tax on split income (Income Tax Act, section 120.4); see paying family members.
• The corporation has refundable tax from investment income, or it is unclear whether a dividend would be eligible.
• You live in Quebec. Quebec has its own return and payroll system, and this page reads the federal rules only.

Example

Illustrative only; all amounts are Canadian dollars.

Take back first

The owner lent the corporation $60,000 earlier and needs $100,000 for the deposit and closing costs. The corporation has the cash, and the shareholder account shows $60,000 owed to the owner, backed by the original bank transfers. The corporation repays the $60,000 first. Only the other $40,000 would need to come out as a dividend or salary. If the owner wants the full $40,000 after tax and assumes a 30% total tax on the dividend, the dividend must be about $57,000 ($40,000 ÷ 0.70), and about $17,000 is set aside for the return. That dividend, if not an eligible dividend, is reported at 115%, about $65,550, with the federal credit and the province's tax applied to it.

Bridge loan

A corporation with a December 31 year-end lends the owner $150,000 on June 1 so the deposit is on time. The owner repays it on December 1 from the sale of an investment, not from new borrowing, so on these facts the principal is not added to income under the one-year rule. The loan was outstanding 183 days. At an assumed prescribed rate of 3% that stays the same, the interest benefit is about $2,256 ($150,000 × 3% × 183 ÷ 365). If the owner pays the corporation that full interest by January 30, the benefit is reduced to nil; a rounded payment can leave a small benefit. The real rate is set each quarter, so the figure changes with it.

Salary and registered plans

An owner takes $60,000 of salary this year. At 18% of earned income, that builds about $10,800 of RRSP room for next year, assuming no other earned income and no adjustments. In a later year the owner can use that room to put cash into the RRSP from their own after-tax pay and, if a first-time buyer, withdraw it under the HBP, keeping the 89-day rule in mind. The plan moves money already taken out of the corporation; it does not add to it. An FHSA has its own room, $8,000 in the first year, which does not depend on salary.

Different for you?

• You need the cash by a closing date, have several years of retained earnings, or want to mix a loan, a dividend and salary: the mix that costs least depends on your province, the corporation's tax pools and the dates, and it is worth settling before the money leaves. See Corporate tax.
• The shareholder account is unreliable or years behind: the books decide what you can take back and what is a loan. See Bookkeeping.
• You want the corporation to own the home: the tax is different. See a home owned by your corporation.
• You already took the money without a plan: see shareholder loans and paying yourself a salary after the fact.
• You are deciding how much to pay yourself overall: see how much to pay yourself.
• The corporation has lost money, or its retained earnings are negative: see dividends with negative retained earnings.
• Your spouse also holds shares: see paying family members.
• You or a co-buyer is a US citizen, or owned a home abroad: your US return may treat an FHSA differently, and a home abroad can affect first-time buyer status; see TFSA and FHSA for US citizens.
• Two owners take different amounts: see shareholders taking different amounts.
• You live in Quebec: check Revenu Québec's rules alongside the federal ones above; they were not read here.