There is a right way and a wrong way to take money out of your business.

The “wrong way” is to simply withdraw cash from your business bank account. It’s not wrong because it’s punishable by the Gods or the law enforcers, but it can result in a punishingly high tax bill. It can also mess with your cash flow if it isn’t planned around the short-term needs of your business.

The “right way” is a little less clear cut. Because what’s right for one business owner isn’t necessarily right for another. It will depend on a variety of factors and there’s no one-size-fits-all solution.

Read this before you go gung-ho and start withdrawing cash. You’ll thank me later!

The most common reasons our clients want to take money out of their business.

Most often it’s because:

  • Their cash balances are too large
  • They need to redeploy capital to alternative investments – side note: read about tax optimized investing here.
  • They want to reduce capital in the business
  • They want to protect cash from creditors
  • They have personal savings and retirement goals they want to fulfill
  • They want to purchase a property for use by the business in your personal name or in a holding company
  • They need it to fund a lifestyle purchase

Do any of these resonate?

If you just have surplus cash in the business beyond your forecasted needs – great! Here are some questions to ask yourself to decide whether to keep it within the business or withdraw it.

There are several different methods for withdrawing cash from your corporation, all with different tax implications.

A few options are:

  • Salary or bonus: these are typically taxed as income at your marginal tax rate, and though they may increase your personal tax liabilities, they could reduce your corporation’s taxable income.
  • Dividend: distributing the retained earnings is generally taxed at a lower rate and have a lower tax impact than salary
  • Capital dividend: these can be paid to you tax free if you have a positive balance in your Capital Dividend Account (CDA)

In general, payroll (salary) should be used for day-to-day living expenses and dividends should be used to clear excess retained earnings from the corporation. However, just like no two businesses are the same, no two compensation plans are the same. Read our article on payroll Vs dividends to get full details on those options.

  • Repayment of shareholder loan: repaid loans by corporations are another tax free option.

To add more options to the table, you can also use: taxable dividends, repayment of expenses, and lowered capital contributions to withdraw excess income from your business for personal use.

Consult us when you plan to take money out of your business, so it doesn’t get messy

Checking in with an accountant first means you get what you need in the most tax appropriate and efficient manner for your situation.

It allows us to plan carefully, rather than rush into things and end up paying for it down the line.

Here’s how we’ll help you figure it out: