Corporation: capitalizing surplus earnings | Income tax filing | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Corporation: capitalizing surplus earnings
November 1, 2023
7:25 pm
AndreyG
Member
Members
Forum Posts: 54
Member Since:
April 9, 2019
sp_UserOfflineSmall Offline

Hello Friends!

I have surplus earnings accumulated in my one-man corporation. I am looking for tax-efficient ways to access it.
Browsing through my corporation’s ‘Articles’ book, in chapter ‘Dividends’ I read: “The Directors may from time to time capitalize any undistributed surplus on hand of the Company and may from time to time issue as fully paid and non-assessable and unissued shares, or any bonds, debentures or debt obligations of the Company as a dividend respecting such undistributed surplus on hand or any part thereof.”

This raises some questions:
- Is this statement valid?
- How to practically do it (do some forms need to be filled? Documents need to be filed?)
- After said procedure what my surplus earnings turn into – assets? Will it be considered as PUC (Paid Up Capital)?
- If I issue ‘capitalized’ funds to myself as (capital?) dividend what will be tax implications?

If the above procedure is legit, are there some references to read?

November 1, 2023
8:25 pm
MG
Member
Members
Forum Posts: 265
Member Since:
February 16, 2013
sp_UserOfflineSmall Offline

Hello Audrey,
You can certainly declare dividends and pay them to yourself. You will need to create a T5 slip and upload it to the CRA website in February. You would then report this as either eligible or non-eligible dividend income on your personal tax return. I am assuming that you are incorporated and file a T2 corporate tax return annually.

November 1, 2023
9:49 pm
AndreyG
Member
Members
Forum Posts: 54
Member Since:
April 9, 2019
sp_UserOfflineSmall Offline

Hello MG,
This is somewhat unexpected answer.
If I follow you advice and declare the amount as 'eligible' dividend it will be practically tax-free, will it? If so why everybody pays any taxes at all?
Either i am missing something or I was 'under the rock' all these years. Can you clarify please?

November 1, 2023
10:10 pm
Norman1
Member
Members
Forum Posts: 6807
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Eligible dividends are not tax free. They are effective taxed at your personal rate less the regular corporate income taxes the corporation has already paid on the corporate income the dividends are from.

November 1, 2023
10:13 pm
MG
Member
Members
Forum Posts: 265
Member Since:
February 16, 2013
sp_UserOfflineSmall Offline

Hello Audrey,
Whether your dividends are eligible or non-eligible depends on your corporation's income tax rate. Typically, small business dividends are non-eligible. The taxation of such dividends is still lower than the taxation of employment income. A good site to look at is taxtips. Here is a link: https://www.taxtips.ca/dtc/non-eligible-dividend-tax-credit.htm The federal government has slowly been diminishing all the tax advantages of having a small business. Your accountant, if you have one, should also be able to provide advice.

November 2, 2023
2:32 am
AndreyG
Member
Members
Forum Posts: 54
Member Since:
April 9, 2019
sp_UserOfflineSmall Offline

1. I use Wealthsimple Tax calculator to estimate tax.
When plug $100k into Non-eligible dividend tax calculated $14096
When plug $100k into Eligible dividend tax calculated $4098
Substantial difference.

2. It seems as non-eligible dividend is used for distribution of profits, earnings.
Process of Capitalization converts profits into assets, capital.
To distribute that eligible dividend is used.
That's my current understanding. I may be wrong, not an expert, just trying to comprehend this.

3. I primarily interested in the process of Capitalization: what it is for, how it should be done, what changes in the books. I believe new share(s) is issued as a result of this process ... this is still beyond me at this point.
Hence the question.

November 2, 2023
11:39 am
AndreyG
Member
Members
Forum Posts: 54
Member Since:
April 9, 2019
sp_UserOfflineSmall Offline

The previous posting and my understanding of eligible vs. non-eligible dividend was all wrong. My apologies.

I remain interested in the process of Capitalization of undistributed surplus earnings: what it is for, what capitalized surplus funds change to, how it should be done, what changes in the books.

November 2, 2023
11:40 am
Norman1
Member
Members
Forum Posts: 6807
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

There's actually no capitalization of the profit. You're just fooling yourself!

The corporation earns the profit and pays small business corporate taxes on the profit. If the corporation then pays the after-tax profit out as a dividend, then you have to gross the dividend back up to its pre-tax level, calculate personal tax, subtract a dividend tax credit for the income taxes the corporation has already paid on the profit, and pay the difference personally.

That the dividend is immediately reinvested in new shares is not important, except to fool oneself.

There's actually no tax advantage is moving income through a corporation if one cannot leave the income in the corporation to be reused for business purposes. That "integration" of Canadian corporate and personal taxes is deliberate to neutralize many attempts to get an advantage by simply flowing income through a corporation instead of receiving the same income personally.

November 2, 2023
11:55 am
Koogie
Member
Members
Forum Posts: 334
Member Since:
November 19, 2014
sp_UserOfflineSmall Offline

I believe the OP is actually asking about the Capital Dividend Account (CDA) ?
ie: the notional account that contains certain types of profit accumulated from a select variety of sources.

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-2-dividends/income-tax-folio-s3-f2-c1-capital-dividends.html

Payments from the CDA can be made tax free to eligible shareholders of a CCPC.

I actually happened to drain my CDA in the summer to fund my wifes RDSP (we are both shareholders).

November 5, 2023
4:15 am
AndreyG
Member
Members
Forum Posts: 54
Member Since:
April 9, 2019
sp_UserOfflineSmall Offline

Thank you for your reply and reference Koogie.

Can you describe the procedure of transferring the funds from Retained Earnings account to CDA account?
What documents did you file with Canadian Revenue Agency?
How you documented Capital Dividend you issued ?
Did CRA have any issues with the transaction?

I appreciate your advice with this matter.

November 6, 2023
12:38 pm
Koogie
Member
Members
Forum Posts: 334
Member Since:
November 19, 2014
sp_UserOfflineSmall Offline

AndreyG said
Thank you for your reply and reference Koogie.

Can you describe the procedure of transferring the funds from Retained Earnings account to CDA account?
What documents did you file with Canadian Revenue Agency?
How you documented Capital Dividend you issued ?
Did CRA have any issues with the transaction?

I appreciate your advice with this matter.  

Firstly, the CDA is notional. ie: imaginary. It does not exist in physical form. So, you don't "transfer" funds from any other account into it in a physical sense.

Instead the CDA is "filled up" and "tracked" via the annual tax return that is done for your CCPC when you declare certain types of income (as noted before in the link I posted) on the corporate return. Eligible amounts of these eligible types of income accumulate over time. You can ask CRA at any time for the "balance" of your accumulated CDA (as it has been reported to them by you or your accountant every year)

When you decide to "empty" the CDA, you have to document it thoroughly. You have to make a written Resolution for the corporation records stating the capital dividend has been paid and you must file a capital dividend election (CRA form T2054) and later on declare it on the corporate return for the year.

Then you simply transfer funds in the appropriate amounts to the appropriate shareholders (as determined by your corporate structure) from your regular corporate bank accounts.

The capital dividend is not reported on your personal return (as it is tax free) nor does your corporation have to issue you a T5. CRA will not have an issue with this as long as it is done correctly.

I honestly have my CA do it but any competent CA, CPA, etc.. can do it. Here is another link that explains it better than I can.

https://thinkaccounting.ca/blog/capital-dividend-account/

November 10, 2023
1:12 pm
AndreyG
Member
Members
Forum Posts: 54
Member Since:
April 9, 2019
sp_UserOfflineSmall Offline

Thank you again Koogie.
I am not yet sure if I can do it this way or not yet it is very helpful of you to explain.

Please write your comments in the forum.