Shareholders are often limited in their ability to withdraw funds from their corporations in a tax-effective manner. Normally, shareholders would take either a salary/bonus or a dividend whenever funds are required personally. Depending on the amount to be withdrawn, shareholders can pay upwards of 53.53% (for salary/bonus) or 47.74% (for ineligible dividends) in taxes in Ontario and this can generate a large personal tax burden. Luckily, it is possible to extract funds from a corporation in a tax-effective manner via a Capital Gains Surplus Strip (“Surplus Strip”).
Through a series of complex transactions, a Surplus Strip effectively allows a shareholder to extract funds at the capital gains rates. In Canada, only one-half of capital gains are taxable, meaning that the maximum personal tax rate on capital gains is 26.77% in Ontario. The following table depicts the anticipated tax savings of extracting $1M from a corporation, assuming that the shareholder is in the highest Ontario marginal tax bracket.
Unfortunately, this type of planning is expected to be eliminated in the near future. In the 2022 Federal Budget, the Department of Finance had stated that they will be looking to close this “loophole” and we expect some news sometime in 2023. Fortunately, this does mean that shareholders can still take advantage of this planning before a possible change in legislation.
We have helped many clients with extracting funds via a Surplus Strip and have worked with reputable lawyers to ensure proper implementation. We would be happy to have a consultation to go over your tax situation and determine if the Surplus Strip is right for you.
Please reach out if you would like to book a consultation or if you had any questions.
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