Withdrawing Cash From Your Corporation
As a sole proprietor, a person can withdraw cash from the business bank account for personal use without tax consequence. However, once the business has been incorporated any withdrawals from the corporate bank account by the shareholder (or any person connected to the shareholder) for personal use DOES have a tax consequence – the amounts withdrawn are generally taxable (usually as a dividend or employment income).
Subsection 15(2) of the Income Tax Act states that when a shareholder borrows money from a corporation that the amount is included in computing the income of the shareholder in the year the funds are withdrawn (“one year repayment” exception). Basically allows for the shareholder to repay the borrowed amount within one year after the end of the taxation year of the corporation in which the funds were withdrawn.
In order for the amount to be deductible to the company, the company must pay a salary to the shareholder. The result of which is that the proper employment source withholdings must be made and paid to Canada Revenue Agency (“CRA”) by the appropriate deadline.
Caution must be taken to ensure that the net salary paid is properly offset against the shareholder loan. CRA does not necessarily consider a shareholder loan repaid if only a journal entry is made.
The fact that there is a deduction available on a future repayment does, in certain situations, provide for potential income splitting or income averaging possibilities.
Other exceptions that could allow an employee (which a shareholder could also be) to withdrawal funds from a corporation on a tax-free basis are as follows:
- The loan is used to purchase a house.
- The loan is used to purchase shares of the company.
- The loan is used to purchase a vehicle that will be used in the course of the employment duties.
The above information is of a general nature only and should not be relied upon for specific situations. Specifically the above discussion only dealt with Canadian resident individual shareholders borrowing money from Canadian resident corporations. Call Marlies Y Hendricks, CPA at 416-766-3941 or submit email enquiry form below to set up a consultation.
