Now that Joe Consultant has money left in his corporation – how does he access it?
STRATEGIES TO ACCES MONEY LEFT IN CORPORATION
1) Dividends
The money that is left in your corporation has already been subjected to the corporate tax rate of 12.2%. In order to avoid double taxation, dividends that have already been taxed corporately are taxed differently in the hands of the shareholders that receive them.
Dividends are taxed more favourably that regular income. In effect, if you have no other income you can receive up $36,000 of dividend income – tax-free!
This strategy can enable you to keep income you have already paid tax on, inside the corporation and to take out these amounts when you will have no other income. For example:
-During your retirement, you could access up to $36,000 each year without paying any further tax – effectively using your corporation as a long term savings plan
-You could split income with individuals who may not be earning an income i.e. retired parents or in-laws
2) Borrowing from the Corporation
It is possible to borrow income from your own corporation on which you have already paid tax. You pay the prescribed Canada Revenue Agency interest rate, which can be very tax effective.
You can borrow money from your corporation for the purpose of purchasing a car or a house. This money must be paid back to your corporation with interest over a period of time. The term of the loans cannot be longer than the term you would be able to arrange with a bank or a car financing company.
3) Investments
Making investments in the name of your corporation is an effective method of utilizing your earnings to achieve a profit.
CAVEAT
The advantages and disadvantages mentioned do not cover the entire spectrum of issues related to incorporating. Some of them can be quite complicated and should be discussed with professional advisors.