How to Extract Cash from a Corporation

Now that you’ve built a successful business (congratulations!) and are looking to extract cash out of the corporation, how do you do it? 

This may be obvious but it is critical that you don’t just treat your corporate account as another personal bank account - your corporation’s cash should not be used to pay your personal expenses and vice-versa.

Salary 

Instead, your corporation can simply pay you a salary. Similar to how you would receive a salary from a part time or full time job, your corporation in this case is your employer and you are the employee.

Like any other employers, your corporation will be responsible for withholding the appropriate payroll tax and social security contribution (such as Canada Pension Plan and Employment Insurance in Canada or Medicare and Federal Insurance Contributions Act in the US) and remit them to the appropriate tax authorities.

One advantage of paying a salary is that your corporation should be able to deduct the salary paid, which should reduce your corporate income tax liabilities at the end of the year.  

Dividend

Another way to extract cash from your corporation is with a dividend payment. A dividend is simply a distribution of residual profits made by a corporation to its shareholders.

Dividend paid by a corporation is generally taxable so you will likely need to pay tax personally. The tax rate will depend on whether it is an “eligible” or “non-eligible” dividend.

Unlike salary, your corporation will not be entitled to a tax deduction on the dividend payment.  

Loan

You can also access the corporation’s cash by having the corporation loan the cash to you. However, where such loan remains outstanding for longer than 2 tax years, the entire amount becomes taxable to the shareholder, retroactive to the date the “loan” was made. 

Therefore, while a loan is a viable temporary solution to extract cash, it is important to monitor timing.