Taking Money from your Corporation Part 3

The 3^rd main way that you will take money from you corporation is through payroll.  Payroll can come in the form of wages, salaries, bonuses, benefits, severance and more.  Payroll may be good if you have a lot of employees, however it is very inefficient if you are a small corporation with little to no employees!  Payroll brings great administrative work, regular $ remitting requirements, and extra CRA filing requirements.  If you are late on a payroll remittance by even a day you could wind up with large penalties, tacking on interest daily.  Having payroll also makes you more prone to a CRA audit as many CRA audits begin with Payroll Trust Exams!  There are many reasons to stay away from payroll, so please do talk to us about your options. 

The key when deciding how to take money from your corporation is understand the rules and follow them.  Now that we’ve outlined Shareholder Loans, Dividends and Payroll in this blog series you have a little understanding of what you can and can’t do.  Here is my tip to you: The best way to take money from your corporation or pay yourself is to simply take draws monthly of what you need to live on (your closed circle) and then when tax planning at the corporation’s year end, we can decide if the draws you took were shareholder loan, dividends, wages or a combination of!  This principal applies the same for taking out a lump sum when necessary.  Keep in mind that if you are married and your spouse is also a shareholder of the corporation, the draws should be in both of your name and put into a joint bank account to give maximum control of income splitting. This is very efficient for tax planning and is legal as you are allowed to borrow/draw money (shareholder loan) from your corporation for up to a year past the corporation’s year end.  In the case of the tip I just gave you, we wouldn’t even need to go past the current corporate year end before we claim it as income, and if there is a reason to not claim it as income this year then we have the option of deferring it.

You now have some great knowledge on the basics of taking money out of your corporation.  Do it wisely and save many headaches and taxes, putting more in your pocket!  For questions, to talk further about this topic and others, or to look at Kustom Design taking care of your corporate accounting and tax needs, don’t hesitate to contact us!

Taking Money from your Corporation Part 2

The other side of the shareholder loan is when you borrow money from the corporation.  This may be a one time lump sum, or may be a series of draws monthly, regularly or sporadically.  You are allowed to have a shareholder loan owing to your corporation for up to one year after the Corporation’s year end date.  So, for example, if you borrowed money from your corporation in the year and then still owed the money on your corporation’s next year end, you would have 1 year from that corporate year end to either pay back the loan, or claim it as personal income.  Now that we understand that rule, does it not seem simple to just take monthly or semi-monthly draws from the company and then at the end of the year, determine if it is in fact shareholder loan, wages, or dividends?  A lot of times you may not know until the year end anyway!  This is a great alternative to trying to keep up with all the payroll administration, remitting and filing headaches!  We will discuss this further in this blog series.

Second, we will now discuss dividends as a way to take money from your corporation.  For more on dividends, please do search my blogs as there is a lot more in depth teaching on dividends.  Dividends are simply a payment of profit from the corporation to its shareholders.  The first rule of dividends from corporations is that dividends can only be paid if the end result, after the dividends are paid, is that the Retained Earnings of the corporation are positive (above zero).  The Retained Earnings of a corporation put simply are a sum of the profits and losses of the corporation, less dividends, since the corporation’s inception.  The second rule of dividends paid from corporations is that each shareholder that owns the same class of shares must receive the same amount of dividends per share.  This is an important topic that is discussed in great length in some of my other blogs, and is important in determining your share structure.  Simply put, if you plan on paying dividends to anyone but yourself (ie. Spouse) then ensure they have a different class of shares than you do, so you remain in control of the income splitting (who gets how much).  Dividends are claimed on the corporation’s T2 income tax return, and are given to you on a T5 reporting slip, which is filed as income on your T1 personal income tax return. 

We’ll cover the third way to take money from your corporation in the next blog. 

Taking Money from your Corporation Part 1

If you own a corporation (or if you are a shareholder), you must know all the ways to take money from the corporation.  Maybe you work for this corporation full time or part time, or maybe you don’t.  Many people from CRA try to convince you to set up a payroll account and make monthly remittances.  This is definitely not the most efficient way to get money from your corporation.  In fact, it’s one of the least.  What if the corporation owes you money for money you loaned it or for an asset you sold to the corporation?  This is called a shareholder loan.  Shareholder loans must always be considered when taking money from your corporation.  In this blog series, we will understand the basics in 3 categories of taking money from your corporation:

1. Shareholder Loans: Loans to and from your corporation
2. Dividends: Payment of profits of the corporation to the shareholders
3. Payroll: Direct Remuneration for work/services rendered

A Shareholder Loan is a loan that can be both from the shareholder to the corporation and from the corporation to the shareholder. Let’s start by looking at a loan from the shareholder to the corporation to get the basic idea.  If you put start up capital into your corporation, pay for expenses on behalf of the corporation or loan the corporation money the corporation now owes you, the shareholder, the money.  You typically won’t collect interest, but you may want to in specific circumstances. 

Another way that you may have a shareholder loan owing to you from your corporation is if your corporation was in need of certain assets that you own personally, such as a car or computer, and you sold the assets to the corporation.  For any asset that the corporation purchases from you it must purchase the asset at Fair Market Value.  Keep in mind that if you are selling an asset that appreciates (not depreciates) than you may end up with a Capital Gain personally when you sell the asset to the corporation.  (This can also be deferred in certain instances)  When you sell the asset to the corporation, the corporation will either pay you right away for it, or pay you later.  If the corporation pays you later then you simply have a shareholder loan owing to you. 

There is another side to the shareholder loan that we will be discussing on the next blog. Please check back next week! 

Tips on Audit Proofing your Business Part 3

We’ve been discussing some great tips on helping audit proof your business.  In reality the majority of businesses in Canada get audited at some point, unless they are short term in nature. Even the short term businesses do sometimes get audited.  So the key is to not hope for an audit, but be prepared in the case you do get audited!

Being prepared for an audit means that you can prove all your transactions with back up documentation and that all flow of funds have good paper trail.  One of the things that CRA almost always looks at in an audit is to confirm deposits going into the Company are either reported as income or elsewhere.  If the deposits into the corporation do not match the income reported, you will have to prove where the other deposits came from.  If you cannot prove where these deposits came from CRA may just deem it as income to the company.  An example of this is shareholder loans.  If you loan funds to your company, keep a good paper trail for proof of the transaction(s).

Another major area that CRA audits is the Shareholder Loan Accounts of corporations.  This is the account that has both incoming and outgoing funds.  Every time you, as a shareholder or director, put funds into the Corporation this shows up in the shareholder loan account.  Every time you pull funds out of the corporation this typically shows up in the shareholder account, until the Corporation’s year end where it may be cleared to dividends, wages etc.  If you cannot document that the payments to you are payments of shareholder loan then CRA could deem it as personal income to you the shareholder.  This is especially the case if they find the shareholder balance to be negative, meaning that you owe the corporation.  You are typically not allowed to owe the corporation any funds for more than 6 months.  In the past many people have set up loans from their corps with interest which used to stand up, but today CRA will just deem it as income to the shareholder or director! 

Utilizing Shareholder Loans

Shareholder Loans are a powerful tool when you have a private corporation. You may loan your Corporation excess funds that you have and receive it back at anytime tax free. You may also take short term loans out during a fiscal year as long as you pay it back within the year. Another way to use a shareholder loan is to put assets into your corporation. This works similar to selling an asset to the corporation. When an asset is sold to the Corporation, you do not have to take the money right away. In fact the Corporation may need the asset now, but not have the money to purchase it outright. You many sell the asset to the corporation without the corporation paying now, but instead owing you the money later down the road, when it has the money and/or when you need the money. Many people take Shareholder “Draws” out of their Corporation throughout the year and then at the end of the year determine if this shareholder draws are in fact dividends or wages.