Tax Free Money
Tax-Free Money that business shareholders can take out from their corporation
In general, as shareholders of a corporation, you can compensate yourself by way of salaries, dividends, or management fees which will be taxable to you according to your personal margin tax rates. However, it is often that shareholders overlook certain items that they would be able to take out tax-free. Let’s look at a few of those items in more detail.
CDA (Capital Dividend Account)
The CDA keeps track of various tax-free surpluses accumulated by a private corporation. These surpluses may be distributed tax-free to Canadian shareholders. The most common items in the CDA are:
- Tax-free portion of capital gain;
- Life insurance proceeds; and
- Capital dividends received from other corporations.
A corporation paying a capital dividend must file an election when the dividend is paid or becomes payable. However, there is a penalty if the corporation pays a capital dividend exceeds the balance in its CDA.
The shareholder loan could be a tricky area. In general, a withdrawal from a corporation by a shareholder will not be included in the income of the borrower if the loan is repaid within one year from the end of the taxation year of the corporation in which the loan was made. However, if the loan recipient fails to repay the loan within the time period, the full amount is included the income of the shareholder under subsection 15(2) of the Income Tax Act. Even though the loan is repaid within 1 year, there is a catch from the Income Tax Act: A benefit will be deemed to have been received by the shareholder under S. 80.4(2), unless interest has been paid on the loan in an amount greater than or equal to interest calculated at the prescribed rate.
On the other hand, shareholders are more often paid expenses on behalf of their company or to inject money into the corporation for its operation. This loan from shareholders to the corporation can be taken out tax-free by the shareholders anytime.
PUC (Paid-up Capital) Reduction
The Paid-up Capital is the amount of money a company has received from shareholders in exchange for shares. When shares are bought and sold among shareholders, no additional paid-up capital is created. Where a shareholder owes shares with high PUC, the PUC can be reduced and returned to shareholders on a tax-free basis.
This article provides information of a general nature only. It is only current to date of posting. It is not updated and it may no longer be current. It does not replace professional advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific questions you should consult a professional service provide.