Your company is doing well. You’ve seen a boost in profits, have made key strategic decisions, and now you have a surplus of cash that you don’t need to cover day to day operations. While this is exciting, deciding exactly what’s best to do with that extra income can feel paralyzing. One of your first thoughts is, “Should I pay myself a bonus?”
When it comes to surplus cash in your business, you have two main options: keep that cash within the business, or withdraw it to distribute amongst the owners. And either option has vital tax considerations that make or break your ability to get the most out of the income you worked so hard to earn.
To figure out what to do with the surplus cash in your business, ask yourself the following questions:
Do I have any short-term business needs for this income?
Having surplus cash beyond your forecasted needs is a great feeling. You don’t have to worry about covering bills or payroll in the coming months, and it’s a good sign that you’re doing something right. But before you decide to reward yourself for all your hard work, first consider if there’s any short-term needs that income can go towards within your business.
This could be income, corporate or HST tax installments or a major capital expenditure that would promote essential growth, like new equipment. Even if there is no short-term need, you can still invest these excess funds into your business in order to maximize its value, but be sure the funds are easily liquidated when the time comes to use them.
Let us know if you’re interested in a cash flow forecast to predict future cashflows and liquitiy requirements for your business.
Do I have any short-term personal needs for this income?
If there are no pressing short or medium term business needs for excess income, you can next consider if you have any pressing personal needs for it. This could be paying off personal debts or funding lifestyle expenses like a child’s education or a new mortgage.
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.
- Capital Dividend: these can be paid to you tax free if you have a positive balance in your Capital Dividend Account (CDA)
- Repayment of shareholder loan: repaid loans by corporations are another tax free option
You can also use taxable dividends, repayment of expenses, and lowered capital contributions to withdraw excess income from your business for personal use. Please see our article on Salary vs Dividends for more info – link to blog.
There’s no one size fits all solution for every business owner. What’s right for both you and your business will depend on a variety of factors, which is why we recommend consulting with an accountant to get personalized advice. If you’d like to discuss your situation, goals, and what option is best for you, get in touch with us here.
What are my long-term goals, and how could this income be best used to serve them?
Finally, if the surplus cash isn’t needed for either personal or business needs in the short term, you can turn your vision to the future. What are your long-term objectives? Are they boosting your retirement savings, enhancing the value of your estate, or having high earnings on financial documents to help with the future sale of your business?
At Titanium, we call these your Big, Hairy, Audacious Goals, or BHAG for short. Everyone has them, but not everyone has the tenacity to chase after them with all they’ve got, which is what sets you – and us – apart from the crowd. That’s why we’re the perfect support network to help you build a roadmap and get exactly where you want to be.
To start moving with confidence towards your BHAG, get in touch today.