Tax-Efficient Ways To Withdraw Money from Your Business
September 22, 2022 | Written by: Sohail Afzal
The taxes involved with withdrawing money from a business can be complicated. There are many different tax-efficient ways, including whether or not the owner has generated enough revenue for themselves and if they plan on investing any additional funds back into their company while taking out cash to fulfill personal needs like improving lifestyle options etcetera.
Have you ever wondered how to pay your business without paying too many taxes? The answer is not always straightforward. No one rule fits all corporations when it comes time to withdraw money or set up an exit strategy. Still, some factors are worth considering before making any decisions – like what tax rates will apply where I live and operate my company today, and which ones were typical back when this type of transaction took place (if applicable)?
Business funds for personal needs can create taxable income and/or tax liability. The first step is to generate enough revenue within the company so the owner can take out cash while maintaining the business’ financial stability. If an owner only withdraws what is needed, they may not have to pay any taxes on the transaction. However, they may be subject to taxes if they take out more than needed.
Two types of taxes could be incurred when withdrawing money from a business: Income Tax and Capital Gains Tax.
Income Tax is charged on any money that is made from the business. It includes money that is withdrawn for personal use. The amount of tax payable will depend on the owner’s marginal tax rate.
Capital Gains Tax
Capital Gains Tax is charged on any increase in the value of the business assets. It includes money that is withdrawn for personal use. The amount of tax payable will depend on the owner’s marginal tax rate and how long they have owned the asset.
Withdrawing money from a business can have tax implications. Speaking to an experienced accountant or tax advisor ensures the owner understands the implications of withdrawing money from their business.
Tax-Efficient Ways To Withdraw Money In Canada
Salary or Dividend Withdrawal
The first way to withdraw money from your business is by taking a salary or dividend withdrawal. A salary withdrawal is considered income and will be taxed at your marginal tax rate. A dividend withdrawal is not considered income, but it is still subject to Capital Gains Tax if the value of the business has increased since you first purchased it.
Another way to withdraw money from your business is by selling assets. You can do it by selling the business or other assets such as property or equipment. The money made from the sale of assets is subject to Capital Gains Tax.
Another tax-efficient way to withdraw money from your business is by taking out a loan. You can do it through a bank or other financial institution. The money that is borrowed will need to be repaid with interest.
Invest in a Registered Retirement Savings Plan (RRSP)
Investing in an RRSP is a good way to withdraw money from your business while deferring taxes. You can use this money invested in an RRSP to purchase shares, bonds, or other investments. The money earned from these investments will be taxed when it is withdrawn from the RRSP.
Invest in a Tax-Free Savings Account (TFSA)
Investing in a TFSA is another way to withdraw money from your business while deferring taxes. You can use the money invested in a TFSA to purchase shares, bonds, or other investments. The money earned from these investments will not be taxed when it is withdrawn from the TFSA.
Wrapping It Up
There are several tax-efficient ways to withdraw money from your business. The best way to withdraw money will depend on your situation. It is important to speak to a qualified accountant or take help from a professional accounting and tax firm like GTA Accounting and get advice from their tax advisory services to understand the implications of withdrawing money from your business.
We hope this blog post has helped you understand the tax implications of withdrawing money from your business. If you have any unique financial needs, please don’t hesitate to contact us.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.