Suppose Bob's company has built up a cash balance well beyond what operations need. Every year it earns interest and dividends, every year his accountant mentions the passive income rules, and every year Bob leaves it alone because each option seems to involve a large tax bill today. Doing nothing is also a choice, and it is often the most expensive one.
The five options, plainly
Pay it out. Salary or dividends get money into your hands now and are taxed now. Right for the money you will spend, wrong for money you would only reinvest personally.
Invest it inside the company. Simple and flexible, but investment income is taxed at a high corporate rate each year, and once it passes $50,000 it starts to erode your small business deduction. See the passive income rules.
Put it back into the business. Equipment, people, an acquisition. The best use when there is a real return to earn, and no use at all when the business is already funded.
Fund a pension-style plan. An individual pension plan lets the corporation make deductible contributions toward your retirement, usually attractive for owners in their forties and beyond who take salary. It is for your own retirement income, not for what you leave behind.
Shelter surplus in an exempt policy. For the slice you will never need back, a corporately owned exempt life insurance policy shelters the growth from annual tax and delivers the benefit to your family at death largely tax-free through the Capital Dividend Account. It is the least flexible option and, for that slice, often the most efficient. Whether it is worth it for you is a numbers question, and we answer it on is corporate life insurance worth it.
This is likely relevant if
- Your corporation holds more cash or investments than operations will ever need.
- Your accountant has raised the passive income grind or the tax cost of winding the company up.
- You can name the part of the surplus that is for your family and charity rather than for you.
- You want the options side by side in plain numbers before choosing.
The insurance route is explained on our page about corporate-owned life insurance in Canada. If you have a holding company, start with which company should own the policy. Our process shows how we get from your balance sheet to a decision.
Talk to us before year end
Doug Leyland and Jordan Matters are Chartered Professional Accountants, CPA, CA, and Private Client Estate and Succession Advisors. We look at the whole corporate balance sheet with your accountant, split the surplus into what you will spend and what you will leave, and recommend insurance only for the part it suits.
Prefer to go deeper first? Request the full guide and we will send you our detailed briefing on corporate surplus.
Common questions
Is it bad to leave retained earnings in my corporation?
Not by itself. Deferring personal tax by leaving profit in the company is one of the main reasons to incorporate. The problem arrives when the surplus is invested and the investment income is taxed at high corporate rates each year, and again when it grinds down the small business deduction.
What is the most tax-efficient way to take money out of a corporation?
For money you will spend, a salary and dividend mix worked out with your accountant. For money that is meant for your family at death, a capital dividend from the Capital Dividend Account is tax-free to the recipient, and life insurance is the most common way to create that credit.
Should I invest inside my corporation or personally?
Investing inside keeps the deferral but exposes the income to high corporate tax and the passive income rules. Investing personally means paying tax on the way out first. The answer usually depends on how soon you need the money and how much passive income the company already earns.
How much of my surplus should go into insurance?
Only the part you are confident you will never need back. We size it from the estate goal and the tax liability, not from the size of the balance, and we stress-test it against a downturn in the business before recommending a premium.
