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Newsletter Page 1 - Toronto Certified General Accountant
Newsletter #5 September 2009
Dear Client or Future Client:
I hope that this newsletter finds you well.
In the Small Business Needs section I will complete the discussion on ways to access dollars
from your corporation on a tax-free or low tax basis. In the Personal Income Tax section, the
topic of probate fees will be discussed.
Pay Tax-Free Dividends (“Eligible” and “Other than Eligible” Dividends)
If a shareholder has no other source of income, the maximum amount of taxable dividends, or
“other than eligible” dividends, that can be received by that individual in 2009, without resulting in
any income tax, is $37,510. “Eligible” dividends, which you may have noticed on your T5 slips since
2006, can be received by an individual tax-free up to $50,320 with no other source of income.
Eligible dividends were designed by the government in 2006 to level the playing field for
corporations paying tax on income subject to the high rate of income tax, which include public
Canadian corporations and certain private resident corporations.
The only taxes owing under the above scenarios would be the Ontario Health Premium of between
$450 and $750 for the personal taxation year.
Pay Tax-Free “Capital” Dividends
Your company may have a balance in its Capital Dividend Account (CDA), and tax-free capital
dividends should be paid to the extent of that balance. A capital gain or loss is the gain or loss that
is made from the sale of an investment, and the taxable portion of the gain currently is 50-per-cent
for both individuals and corporations. The CDA accumulates the 50-per-cent tax-free portion of net
capital gains realized by the company, and also the amount of any life insurance proceeds paid to
the corporation as a beneficiary on your death (net of the cost of the policy). It is important for
your accountant to always issue the shareholder(s) a capital dividend when there is a balance in
the account, because it can be wiped out if the company sells an investment for a capital loss in a
subsequent year, and you (or your estate or heirs) would lose out on the opportunity of these
tax-free dividends.
Pay a Retiring Allowance
A retiring allowance paid to an employee upon or after retirement to recognize long service must
be included in income. The employer is not required to withhold tax if the tax-eligible retiring
allowance is contributed directly to the employee’s RRSP. Business owners should pay themselves
a retirement allowance, with no tax today, from the business when it’s time to retire. In addition,
the allowance can exceed the individual’s normal RRSP contribution limits to a maximum of $2,000
for each employment year prior to 1996, plus an additional $1,500 for each employment year prior
to 1989 in which the employee did not have vested rights in an employer-sponsored pension plan
at retirement.
Loans to Shareholders
Generally, a shareholder loan is required to be included in the taxpayer’s income in the year the
loan was made. However, there are certain exceptions. One is that the loan must be repaid by the
end of the following fiscal year of the corporation making the loan. There is a taxable benefit to the
shareholder for this no-interest loan from the company, which is based on CRA prescribed interest
rates, and is included on the shareholder’s T4.
Loans To Shareholders (Cont'd)
The other exceptions when a shareholder loan is not income in the year the loan was made are
for the following purposes:
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