If you’re always surprised with how much taxes you owe, you’ll want to read this.
One of the biggest mistakes I see business owners make is pulling out money from the corporation without any sort of tax planning. Pulling money out can happen in a few different ways:
- You are transferring cash directly from your business’s bank account to your personal bank account
- You are paying for personal items, such as your home expenses, personal vacations, etc. from the corporation’s bank account
- You have a company owned or leased vehicle that you also use for personal reasons
All of the above are examples of a business owner pulling money out of their company. So why is this a problem? Well, when you pull money out of the company like this, it becomes a “shareholder loan.” You are supposed to pay it back to the company, and if you don’t, you must include it in your personal income and pay tax on it, and if you’re a business owner, you should know by now that personal tax rates are much higher than corporate tax rates in Canada.
Tax planning is something that should be done throughout the year, not just during tax season. By then, it will be too late since you’ll have pulled out all that money already (and most likely spent it).
So next time you are thinking about paying for that personal vacation, or want to transfer some cash to your personal account, remember that this will most likely be something you will be taxed on at your personal tax rate. My best advice is to talk to your accountant, figure out how much money you need for personal reasons, and put yourself on a mix of salary/dividend to achieve the minimum tax you’ll need to pay.
– Daniel Breez