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Tax Efficient Ways To Get Funds Out Of Your Business
For small or medium-sized business owners, the concept of income or salary is fluid and reliant on the business itself, the corporate structure and hope that you financed your business at the outset. Often the way you structure your company will have a big impact on how tax efficient you can take money out of your business.
 
The mistakes we have seen so many business owners make and the loss of profits is completely avoidable. Some solid professional advice on Salary or Contractor Fees, PUC or "Paid-Up Capital", Dividends and Shareholders Loans are just some of the many topics that need to be explored with your legal and financial team.

Salary or Contractor Fee
The first option for you as an owner is to pay yourself a salary, with the business entity as an employer. The salary that you earn will be taxed at the normal income rate once you have received it, but will be tax deductible, as an expense by the business. For the purpose of insurance and long term benefits, receiving a regular salary can constitute a certain safety net. This is because some of your tax burden as an employee shall be Canada Pension Plan and Employment Insurance contributions. Both contributions are made mandatory by government institutions, and are aimed at providing a stable source of income in the events of retirement and/or injury or illness. However, often this is a less than effective way to provide for the future if you are a business owner.
By using this method, you would be paying a higher personal tax rate than if the same money was taxed as small business profits. This is because a small corporation can claim a deduction on the basis of an active business income up to the small business threshold of $500,000. Taking a salary alone is often a tax efficient choice for the entrepreneur. 

PUC
The second option is to claim repayment of the capital that you originally invested in your business. This investment amount is generally credited to an account known as Paid-Up Capital (or “PUC”), and can be repaid at any time, tax-free. In general, the PUC value attaches to a particular class of shares, not to any shareholder or taxpayer specifically. This means that PUC is generally computed according to the value of the authorized shares that the business has sold and received payment for. We call this “stripping the PUC”, and if you paid a significant amount for your shares, this return is highly desirable from a tax point. If you chose to withdraw your PUC from the business, it will be paid to you as tax-free capital. However, this computation of the PUC is required to be done very carefully so as to not overstate its value. Any overstated amount shall be considered dividend income and taxed as such.
Under the Canada Business Corporations Act, and the Business Corporations Act (Alberta), PUC is determined according to the ‘stated capital’ account maintained for the particular class of shares. This ‘stated capital’ is the consideration or payment that was received on the original issuance of the shares. However, in non-arm’s length circumstances, the PUC will be lower, based on the nominal value for shares that you paid, as founder, at the time of incorporation. Structuring PUC redemptions and computing the value of the PUC is a complicated process that may have tax consequences later if not stated clearly in the accounts of the business. Advice of an experienced tax lawyer or an accountant would be necessary to garner the full value of your PUC.

Dividends
A third option is to withdraw profits from your business in the form of declared dividends. These dividends will also ensure your business a tax credit for the business paid, in certain circumstances.
Without going into too much detail, there are eligible dividends and ineligible dividends. Ineligible dividends are taxed at a lower rate. In case the dividends are ineligible, the combination of taxes paid by the business (the tax credit would then not apply), and the personal taxes paid by you on receipt of the dividends, would often amount to the same tax burden as would be paid by you on your salary.

Shareholders Loans
A fourth option is to take an interest- free shareholder loan from the business. The general rule for tax purposes is that the full amount of the loan shall be included in the total income of the shareholder in the year the loan was advanced. It is important to note that this will be taxed as income, and not as dividend. However, there are some exceptions to the general rule. For instance, the Income Tax Act says that a shareholder loan will not be considered as income for tax purposes if the loan is repaid within one year of the corporation’s taxation year in which the loan was made. However, the loan repayment must not be a part of a series of loans and repayments, that is, a shareholder cannot borrow and repay using this scheme two years in a row. The shareholder’s loan is heavily dependant on sensible structuring of the loan itself. This is especially true if the transaction is on non-arm’s length basis. If a shareholder on the other hand has made a loan to the corporation, any repayment of the principal amount is tax free, and the shareholder will only be taxed on the interest income earned on the loan.

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