Investing in your business and tax-free money
The shareholder loan account is used to track the money an owner has invested in their corporation. When you have loaned your corporation money, when it pays you back, it is not income, so it is not taxable. Here are a few practical ways small business owners can build up their shareholder loan account:
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Declaring compensation you didn’t even take. In a low-income year, you can exercise some “tax planning” by declaring income you didn’t even need (or even really receive). You can declare a dividend, pay tax on it, and then just pay it right back to the company, as a loan. You can then withdraw it later, and pay no tax on it. If you plan on being in a higher tax bracket down the line, this can save you some serious cash.
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When you started your business, it probably required more money than it made. These investments in your business are loans that can be paid back tax free.
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As you run your business, there are write-offs that you’re entitled to, but aren’t getting paid for. Think home office, cell phone and internet.
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Using personal stuff for business purposes? Get credit for vehicle use, computers, cell phones and furniture.
If you have ever paid capital gains tax in your corporation, you might have a balance in your Capital Dividend Account. This is tax-free money that you could get your hands on. You will need your accountant to handle all the paperwork for this tax-free money, but it’s worth it, especially in a high-income year.
RRSP: Save tax dollars now, but pay them back later. Also pay tax on all your earnings as you withdraw cash from your RRSP.
TFSA: Investing after-tax dollars now, but no earnings or growth is ever taxed in the future. There is no tax benefit now, but there is tax benefit in the future.