The little red single-cab Datsun pickup I camped in as a youth seems modest in retrospect, but was luxurious compared to what my older siblings went out in. The camping vehicle of choice for them was a tiny little Volkswagen Beetle. It was gutless, even more so than the little four-banger we later drove around in.
Loaded down with human cargo, fishing gear and camping stuff, the Ryan boys once got caught in a torrential rainstorm on an old dirt road near Lillooet.
The gas heater worked intermittently, meaning the windows were steamed up by the summer rains. The road was muddy and slippery, and the tires well-worn as they worked their way down a steep section of road, hoping to make it through the small lake gathering at the bottom of the gully. They made it through the chocolate puddle, but not much further on the first attempt.
They backed up the vehicle through the water as far as it would go before the tires began to spin. Then they drove through the puddle at the bottom trying to accelerate it up the other side until the tires were spinning again.
Dad shifted quickly into reverse, backed up through the puddle and strove up the hill again until, again they spun to a standstill. They repeated this process several times until finally the mud soaked vehicle, with my dad at the helm and my brothers out pushing, was able to overcome the slimy slope on the other side.
Soaked in mud and drenched with rain, the two boys climbed back into the tiny vehicle and the gang made their way to the campsite.
They could only aspire to the relatively elite tenting class of outdoorsmen. Their "tent" was a clear plastic tarp and a few large spikes and a shovel to dig a trench around the edges. They climbed into the cheap Army and Navy sleeping bags and crawled onto the bare ground next to the smoking fire. They had dried their very filthy clothes by the fire, and heated a few rocks to tuck around their sleeping bags keep them warm for the first few hours of the night.
Despite their impoverished conditions, they never came home empty-handed. Always bragging about limiting out, they typically filled the freezer every summer with pan fryers, which we made good use of throughout the fall and winter.
The family eventually grew in size and wealth, and graduated from tarps to tents and even a truck canopy, luxurious in comparison.
Businesses also often follow a trajectory from humble beginnings to increasing prosperity. In our continuing series exploring ways to extract funds from your corporation, today we look at another method here.
Paying a
taxable dividend
Your corporation may pay you a taxable dividend. The income earned in your corporation is first taxed in the corporation at its corporate tax rate and then the after-tax funds are paid to you as a dividend. You then pay personal tax on the taxable dividend at your marginal tax rate.
It appears that the same income is taxed twice, once in the corporation and then again personally in your hands when funds are withdrawn as a dividend. However, the Canadian tax system is designed so that the combined corporate and personal income tax paid on income earned through a private Canadian corporation and distributed to you as shareholder should equal the income tax that you would have paid if you earned that income personally outside of your corporation.
This is known as "integration."
However, integration is not perfect and the integrated tax rate is quite different depending on whether your corporation is earning No. 1: Active Business Income (ABI) below the small business limit, No. 2: ABI above the small business limit or No. 3: investment income.
Eligible dividends
Eligible dividends were introduced to apply to dividends paid after 2005 by a Canadian corporation to a Canadian resident shareholder. Eligible dividends are subject to an enhanced dividend "gross-up" of 38 per cent and a federal dividend tax credit of approximately 15 per cent of the grossed-up dividend. There is also a provincial dividend tax credit available.
If ABI is below the small business limit, your corporation can pay eligible dividends to the extent that its income is taxed at the general corporate tax rate.
Investment income
Although investment income is taxed at a high rate in the corporation, this type of income cannot be paid out as eligible dividends.
Investment income earned by an operating company is taxed in the same manner as investment income earned in a holding company, where the investments are not incidental to the business.
We are only covering the high points here. There are many ways to consider transferring cash from your corporation to its owners. We continue to explore this topic next week.
This article is not meant to be individualized tax or legal advice. Readers should consult their own professionals before proceeding with a strategy.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities, (member CIPF) and can be reached at [email protected].
