As we all know corporate income tax rates are substantially lower than personal income tax rates, especially if you have income eligible for small business deduction. You do not have to pay any personal income taxes on the income earned by your business unless you take the money out of the corporation. Thus, you can save or defer personal income taxes by leaving the income earned by your business in the corporate bank account. I advise my client to avoid paying personal income taxes on income earned by their businesses by leaving income earned in the corporate bank account. There are certain provisions in the Income Tax Act that taxpayers can use to borrow money from their corporations without having to include the amount in their personal taxable income. Thus, as a general rule corporate funds can not be used for personal use without first including the amount in personal taxable income, however there are exceptions (there are always exceptions).
What are the exceptions you ask?
- You can borrow money from your corporations for almost up to two years without having to include the principle amount in income as long as you pay it back within two years,
- You can borrow money from your corporation instead of a bank to buy your principle residence,
- You can borrow money from your corporation instead of a bank to buy a vehicle which you are going to use for your business,
- You can borrow money from your corporation to buy previously unissued fully paid shares of your corporation etc.
There are several conditions and restrictions that you have to abide when choosing any of the exceptions mentioned above. Thus, before you take out any funds from your corporation make sure you talk to your tax specialist to ensure proper documentation is prepared and maintained so that you are not caught of guard.