What are some of the most tax effective methods to pay yourself from your corporate earnings?

Salary vs. Dividend Mix:

Take out profits using a mix of salary and dividends to maximize your tax savings. The best combination depends on your income level, the corporation’s income level, your cash flow needs and other factors.

Shareholder Loan:

If you loaned funds to your corporation, you can receive any amount of repayment on these loans tax free.

Salary paid to a family member:

Tax savings may be available if a salary is paid to a family member for work performed and the family member is in a lower tax bracket than the corporation.

Paid-Up Capital:

If your corporation was originally funded with a substantial amount of capital, you may also be able to withdraw funds tax-free by reducing the corporation’s paid-up capital — (i.e. the amount of capital contributed to the corporation in exchange for its shares). Generally, you’re allowed to pay shareholders any amount less than the corporation’s paid-up capital without tax consequences, where you also reduce the paid-up capital by that amount.

Capital Dividend Account:

When a private corporation realizes a capital gain, the untaxed portion (one half of the gain) is added to its capital dividend account. The corporation can pay any amount from this account to its shareholders without paying personal tax, as long as you make the appropriate tax elections and file the directors’ resolutions with the Canada Revenue Agency.

If the corporation has realized any capital gains (excluding any realized losses, which reduce the amount of the account), you should look at having it pay out capital dividends. The paid out capital dividends cannot be reduced by subsequent capital losses.

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