Entrepreneurship & Small Business

How long can I keep the money in the company?

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  • Sep 16th, 2017 10:51 pm
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[OP]
Member
Jul 5, 2006
430 posts
192 upvotes

How long can I keep the money in the company?

I am an IT consultant and incorporated. If I stop consulting business, my company will have no income. I wonder whether I can leave all the money there until I retire as long as I file tax return every year. If yes, there is clear tax benefits since I only need to pay for the corp tax. Can I keep on claiming some business expenses? I was told only for three years after no income. Is this true?
13 replies
Deal Addict
Aug 19, 2013
2397 posts
1080 upvotes
right4you wrote: I am an IT consultant and incorporated. If I stop consulting business, my company will have no income. I wonder whether I can leave all the money there until I retire as long as I file tax return every year. If yes, there is clear tax benefits since I only need to pay for the corp tax. Can I keep on claiming some business expenses? I was told only for three years after no income. Is this true?
The income can remain in the corporation as long as you like.

I don't know where you heard this 3 year thing but it's total bs and whomever told you that knows nothing about accounting.

You can only deduct expenses that relates to earning income. If you are not earning any income you have no expenses.
[OP]
Member
Jul 5, 2006
430 posts
192 upvotes
Momof3cuties wrote: The income can remain in the corporation as long as you like.

I don't know where you heard this 3 year thing but it's total bs and whomever told you that knows nothing about accounting.

You can only deduct expenses that relates to earning income. If you are not earning any income you have no expenses.
How about my company keeps on looking for something but cannot find any so the income is zero. Can I claim expense in this case? If yes, for how long?
Regarding tax, let's say my company makes $100k this year. I leave the after tax (16%) money ($84k) there. When I retire, I pay myself $45k dividends and pay the difference of the tax rate between corp and personal which is around 4%. Is my math correct?
Jr. Member
Mar 6, 2015
190 posts
240 upvotes
As long as you can demonstrate that you're looking for your corp to generate revenues, you will be able to deduct expenses in the normal course of operations (i.e. admin, office, insurance, utilities, ect.). But after some time with consistent losses and no revenues, you'll get inquiries from CRA what your intentions are.

Keep in mind that if you file quarterly, you'll need to show on your sales tax report the revenues billed in that period. All of a sudden showing zero revenues when the government is accustomed to your reports showing sales could trigger a telephone call or a desk audit. But if you actually have no revenues, then there's nothing to fear.
[OP]
Member
Jul 5, 2006
430 posts
192 upvotes
MTLCPA wrote: As long as you can demonstrate that you're looking for your corp to generate revenues, you will be able to deduct expenses in the normal course of operations (i.e. admin, office, insurance, utilities, ect.). But after some time with consistent losses and no revenues, you'll get inquiries from CRA what your intentions are.

Keep in mind that if you file quarterly, you'll need to show on your sales tax report the revenues billed in that period. All of a sudden showing zero revenues when the government is accustomed to your reports showing sales could trigger a telephone call or a desk audit. But if you actually have no revenues, then there's nothing to fear.
Thank you for the clarification.
Can I keep the money in my company until I retire even though my company does not have any income for many years? Of course I will fill corp tax every year. Will the company become sort of inactive and change in the tax rate? Is my calculation regarding tax above correct?
Jr. Member
Mar 6, 2015
190 posts
240 upvotes
right4you wrote: Thank you for the clarification.
Can I keep the money in my company until I retire even though my company does not have any income for many years? Of course I will fill corp tax every year. Will the company become sort of inactive and change in the tax rate? Is my calculation regarding tax above correct?
For active businesses, many business owners treat their corporation as their retirement plan since the retained earnings inside the company is sheltered at a lower rate of tax. As long as you're filing the T2's as needed, answering other government correspondence, and paying the annual registration costs, your company will not be arbitrarily dissolved.

If the corp will be inactive, why are you concerned about the tax rate? Tax rates only apply when there is activity in the company.
[OP]
Member
Jul 5, 2006
430 posts
192 upvotes
MTLCPA wrote: For active businesses, many business owners treat their corporation as their retirement plan since the retained earnings inside the company is sheltered at a lower rate of tax. As long as you're filing the T2's as needed, answering other government correspondence, and paying the annual registration costs, your company will not be arbitrarily dissolved.

If the corp will be inactive, why are you concerned about the tax rate? Tax rates only apply when there is activity in the company.
I intend to use company account for tax defer just like the RRSP account. Is it possible?
Deal Addict
Aug 19, 2013
2397 posts
1080 upvotes
right4you wrote: I intend to use company account for tax defer just like the RRSP account. Is it possible?
If you intend to put investments in the corporation remember that investment income in a corporation is often taxed at a higher rate then active business income. So there is not much of a tax deferral.

You are much better off putting investments in an actual rrsp if you have the room.

You should really sit down with an accountant who can explain all this in detail and look at your personal situation. Corporate taxation can be confusing.
Deal Addict
Sep 24, 2010
1921 posts
215 upvotes
right4you wrote: I intend to use company account for tax defer just like the RRSP account. Is it possible?
That's fairly smart. Never thought of it this way
[OP]
Member
Jul 5, 2006
430 posts
192 upvotes
Momof3cuties wrote: If you intend to put investments in the corporation remember that investment income in a corporation is often taxed at a higher rate then active business income. So there is not much of a tax deferral.

You are much better off putting investments in an actual rrsp if you have the room.

You should really sit down with an accountant who can explain all this in detail and look at your personal situation. Corporate taxation can be confusing.
Thank you for reminding the tax rate being different. In this case, how about loaning the money to myself until I retire? Then I pay myself dividend. So the corp account can work like a RRSP account. Will it work?
Jr. Member
Mar 6, 2015
190 posts
240 upvotes
right4you wrote: Thank you for reminding the tax rate being different. In this case, how about loaning the money to myself until I retire? Then I pay myself dividend. So the corp account can work like a RRSP account. Will it work?
Please see an accountant who can advise you more thoroughly than what's possible here. You were given some key points to consider.
Deal Addict
Feb 25, 2007
1311 posts
776 upvotes
Ottawa
This is the sort of thing you can best sort out with your accountant.

You can leave money in your corporation (or put it in a holding company) and leave it there a long time, until retirement. Many entrepreneurs do that. It has pluses and minuses.

If you pay it out to yourself, as you make it, then the principle of tax integration means your corporate tax within the company, plus additional dividend tax when you pay it out, will be approx the same as if you paid yourself income, i.e. at normal graduated tax rates. If you pay yourself income, you will earn RRSP space and you can defer tax on some of that income, plus on investment gains on that capital once you put it in your RRSP, until when you draw down your RRSP.

If you keep the money within a corporation, you only pay the small business corp tax rate on the profits when you earn them in your company. You may invest the rest within the corp. You will pay tax on the investment proceeds that is higher than you would pay as an individual. You will need to pay taxes on the original profit when you do take it out as dividends eventually, but this may be at a lower personal marginal rate that you would have paid in the year you earned the money. It's a form of income splitting with your future self. Therefore, compared to taking the money out, you are i) potentially reducing total tax payable on the retained earnings, and/or ii) potentially at least deferring some of the taxes that would otherwise be payable, therefore able to invest more. However, iii) your actual investment earnings are likely taxed more. So it's a tradeoff you need to calculate. Finally, keeping your company going (or a holding company going) is a bit of a hassle and you will have some accounting expenses each year, so that has to be weighed into the tradeoff as well.
Deal Addict
Aug 19, 2013
2397 posts
1080 upvotes
right4you wrote: Thank you for reminding the tax rate being different. In this case, how about loaning the money to myself until I retire? Then I pay myself dividend. So the corp account can work like a RRSP account. Will it work?
No this will not work. Again as many have suggested if you want to use a corporation for tax planning you need to sit down with a good accountant.
Newbie
May 12, 2017
48 posts
49 upvotes
houska wrote: You can leave money in your corporation (or put it in a holding company) and leave it there a long time, until retirement. Many entrepreneurs do that. It has pluses and minuses.
I wonder if any RFD'ers have insight as to how the proposed "reasonableness test" to CCPC dividends will affect this strategy for current retirees with large retained earnings balances. For example, in 2018 if a corporation has $50,000 retained earnings but zero active business income, can the corporation pay out a $50,000 dividend from 2017 retained earnings to a shareholder without having to prove that the shareholder did $50,000 worth of work for the corporation? In this case no work is being done by any shareholder, so this reasonableness test makes no sense.

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