Three ways to take the same
dollar out of your company.

If you’re searching for how to take money out of a corporation in retirement, or what happens to a holding company when you stop working, this covers how the distributions are taxed and the order worth using.

You sold the business, or wound the operations down, and kept the company. There’s money in it. Now it’s one of the places your retirement income comes from, sitting alongside the RRIF, the TFSA and whatever’s in your own name.

Most retirement planning ignores this entirely, which is a problem, because the corporation is usually the most flexible source you have and the one most likely to be handled badly.

It isn’t one kind of money

This is the part that surprises people. A dollar coming out of your company can be taxed in completely different ways depending on which notional account it comes from.

The same dollar, three different outcomes

Why this makes the corporation useful

A RRIF gives you no choice. The minimum comes out, it’s fully taxable, and the percentage rises every year.

A corporation gives you a dial. You decide how much comes out and in what form, which means it can fill the space left over after the RRIF minimum, CPP and OAS have taken their share, and stop exactly where you want it to stop.

That makes it the natural tool for staying under a threshold. Including the one at $95,323 where OAS starts being clawed back.

What usually goes wrong

It gets left until last. The thinking is that money inside a corporation is deferred, so leave it. But it’s also money that will eventually be taxed, and leaving it means a larger balance coming out in fewer years, often at worse rates.

Investment income inside it is taxed at roughly 50%. A corporation that’s no longer operating still earns investment income, and that income is taxed at the high passive rate while it sits there. The mechanics of that are in what to do with cash sitting in your corporation.

The capital dividend account gets wasted. Capital losses reduce the balance. A CDA balance that could have been paid out tax-free can shrink or disappear, so there’s usually a case for taking it sooner rather than banking it.

The final year is a problem nobody planned for. Whatever is left in the company at death creates its own tax consequences, and they’re frequently worse than drawing the money out over the preceding fifteen years would have been.

What a plan looks like here

Work out what the household needs each year. Fill it in the cheapest available order: RRIF minimum because you have no choice, then whatever keeps you under the thresholds that matter, then the corporation in whichever form costs least, then the TFSA last because it’s the only money that never counts as income.

Do that every year, deliberately, from the day you stop working until the company is empty.

General information only. Corporate distributions, notional account balances and their tax treatment depend on the specific circumstances of the corporation. Confirm the details with your accountant before acting.

Common questions

How do I take money out of my corporation in retirement?
Through dividends, salary, or a return of capital, depending on the company’s notional account balances and your situation. The form matters, because a capital dividend is received tax-free while a non-eligible dividend is taxed at a higher personal rate.

What is a capital dividend?
A tax-free dividend paid from the Capital Dividend Account, which is credited with the non-taxable half of realized capital gains. Capital losses reduce the balance, so there is usually a case for paying it out sooner rather than accumulating it.

What is the difference between eligible and non-eligible dividends?
Eligible dividends come from income taxed at the higher general corporate rate and carry an enhanced dividend tax credit, so they are taxed at a lower personal rate. Non-eligible dividends come from income taxed at the small business rate and carry a smaller credit.

Should I wind up my corporation when I retire?
Not necessarily. A corporation that still holds investments gives you control over how much income you take each year and in what form, which is useful for staying under thresholds such as the OAS clawback. Winding it up removes that flexibility.

How is investment income inside a corporation taxed?
Interest and foreign income are taxed at roughly 50% in most provinces, with a portion refundable when dividends are paid. Capital gains and Canadian dividends are treated differently. This applies whether or not the company is still operating.