What’s involved with an owner withdrawal of cash from a corporation


Since both apply to you, Linda, that means you can choose either option. 

When a corporation pays a salary, it deducts that salary from its business income. So, say your corporation earns $100,000 per year, and you pay $75,000 out as a salary. The salary would reduce the corporation’s taxable income to $25,000 (ignoring other business expenses). 

Say you live in Saskatchewan, Linda. Your corporation, assuming it qualified for the small business deduction, would pay 11% corporate tax on that $25,000 of income, leaving $22,250 in cash. I suspect over time this is how the $100,000 of cash you have currently has been accumulated.

What is a dividend?

A dividend is a payment of after-tax corporate savings to a shareholder. Dividends are taxed personally at lower tax rates than salary to account for the fact that corporate tax was already paid on the earnings. In an ideal world, the dividend would be taxed at 11% less when paid to you and result in perfect integration in my example but the actual difference can vary. The tax rate is always lower on dividends than salary.

In any event, Linda, you could pay out your $100,000 in cash as dividends now, over the next few years, or in retirement. 

What you can do with dividends

If you did it now, you would pay a lot of tax as the dividends would be in addition to your salary for the year. But if you have room to contribute to a registered retirement savings plan (RRSP), you could use the money to be invested and growth tax deferred. A RRSP contribution could more than offset the tax on the dividend. 

For example, if you have a $75,000 salary, pay a $100,000 dividend, and have $100,000 of RRSP room to make a RRSP contribution, the net result could be a $7,000 tax refund, fully offsetting the tax on the dividend (assuming Saskatchewan residency and ignoring other deductions or credits). 

If you paid the dividends over the next few years, you could do this to top up your salary assuming you are going to semi-retire, as you alluded to doing. As an example, if your business income went from $100,000 to $50,000, you might reduce your salary to $50,000 and take some dividends to top up your personal cash flow needs.