How to Withdraw Money from a Corporation in Canada?

 

Corporations and their shareholders are separate legal persons. Earnings of a corporation are not the earnings of Shareholders of a corporation. Shareholders can withdraw money either in the form of salary or dividends. What is the difference between a salary and a dividend? Read this post.

Salary Vs. Dividend - How to withdraw from your Corporation ...

Salary results in an income tax deduction which reduces the corporate income tax at the end. Salary is an employment income for the shareholders and the corporation must make source deductions on such a payment. A T4 is issued at the end of the year to the shareholder-employees who record it as an employment income in their personal income tax returns.

A dividend is a distribution of the after-tax earnings of a corporation. Unlike salary payment, dividend distribution does not result in an income tax deduction for the corporation and does not reduce the corporate income tax. A corporation must issue a T5 to each shareholder at the end of the year. Shareholders record this as investment income in their individual income tax returns in Canada. A quick guide on how to issue dividends in Canada can be found here.

Corporations are subject to different tax rates as compared to personal income taxes in Canada. On the surface, it creates a mismatch and disadvantage! However, the Canadian tax system is integrated in a way to avoid this mismatch. It gives rise to a Gross up and dividend tax credit. Shareholders increase the amount of actual dividend, that’s a gross-up while filing their personal income taxes in Canada. This investment income is then taxed at personal margin rates. A dividend credit is available to avoid double taxation of investment income.

It is always better to create a salary and dividend mix. A professional corporate tax accountant in Canada can help you with creating a salary-dividend mix to bets optimize your corporate and personal income taxes.

Dividends in Canada are further divided into two major categories, eligible and non-eligible dividends, both of which have different gross-up factors and dividend tax credits available for them. Then, there are tax-free capital dividends. Return of Capital is always tax-free, however, you should be careful from getting caught into deemed dividends.

Maroof HS CPA Professional Corporation is a CPA firm providing services in Canada. It is registered with CPA Ontario and Alberta with its office in Greater Toronto Area. If you are looking for corporate income tax services including corporation tax preparation or corporate tax planning while also benefiting from personal tax planning for your shareholders, reach us.

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