Spending weeks on end in the bush as a kid, created abundant opportunities for me to learn to drive.
From age twelve, I was encouraged to take my turn behind the wheel on the quiet, winding dirt roads, several dozen miles from the nearest highway - a relatively safe training ground.
As I got a little more experience, just after turning 15, I was allowed to take the wheel on the open highway. The straight and relatively uncomplicated functionality of a paved road seemed pretty simple after dodging potholes, campers and wildlife, while constantly changing gears on the dirt road. On the highway, Dad would sometimes nod off while we drove, which I always thought was the nod of confidence.
The problem was, I had never experienced the complexities of driving in traffic. I generally pulled over and let Dad take over just before the next city or town because we were worried about the authorities taking issue with the peach-fuzzed operator at the helm.
After a month or so of fairly regular summer highway driving, I found myself entering Prince George, my father snoring beside me, and my friend gazing blankly out the window.
Hmmm, what to do?
I turned right as I pulled in to the junction of Highways 16 and 97, deciding I could handle it without waking up the old man.
What could be so hard? Merging. Hmmm, mergy-merge, merging... here we go! Expecting to somehow magically blend in to the eastbound Highway 16 traffic, I suddenly realized I was about to broadside oncoming traffic and slammed on the brakes, screeching to a halt.
My dad's head hit the dash as he woke up with a thud, swearing.
It turns out that merging traffic is actually a fairly complex skill, and one that I had never confronted until it was nearly tragically too late.
After years of being at the helm of your corporation, merging its accumulated surplus in to the rest of your life is probably ore complex than you first imagined. Taxation issues are tough. In this third article in this series, we continue to explore issues pertaining to surplus funds in the corporation, this time with a focus on withdrawing the cash for person needs.
First the simple stuff:
Reimbursing you
for business expenses
you paid personally
If you personally paid for anything related to your corporation, you can get your company to reimburse you for those expenses. Common examples are using your vehicle or other property for business purposes or entertaining clients with your own money.
Your company will get the tax deduction for the business expense, but it is important to keep accurate records and receipts and you get reimbursed, tax-free.
Repaying amounts
owed to you
Your corporation may owe you because:
You transferred personal assets to your corporation and received no cash or shares in return.
Your company declared a dividend or a bonus and you loaned the funds back to your corporation;
You personally incurred business expenses, as discussed above, but weren't reimbursed yet.
Paying a salary or bonus
You may consider paying yourself a higher salary or a bonus from your operating company. If your spouse and children help out in the business, consider paying them a reasonable salary for services rendered. This is a great income-splitting strategy that may save your family money if your children or spouse is in a lower tax bracket than you. In addition, a salary or bonus is considered earned income for the purposes of generating RRSP contribution room.
When to pay yourself
A salary paid by your company is deductible for the corporation; however, any salary received by you is taxable at your personal marginal tax rate. Therefore, it may make more sense for your company to pay you a salary if it is paying tax at the high general corporate tax rate as opposed to the small business rate. This only applies to an operating company that is earning an income from its business operations, known as active business income (ABI).
In general, the first $500,000 of ABI earned by a Canadian Controlled Private Corporation is taxed at the favourable small business rate.
However, this small business limit is phased out for corporations or corporate groups with taxable capital employed in Canada of greater than $10 million, regardless of their taxable income.
From the Canada Revenue Agency's point of view, paying a salary to the shareholders of a holding company that earns only investment income (passive income) must be reasonable based on the facts of each particular case. Consider the duties performed, the time expended in carrying out those duties, the experience and skills needed and market rates for similar services.
These strategies are for information purposes only, and are not to be considered tax or legal advice. You should refer to your qualified tax advisor before implementing a strategy.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
