Stealing From Your Own Business

Many people fail to realize that a corporation is a separate entity, essentially a separate person from the individual who owns the company. And while it is the owner who makes the business decisions, manages the cash flow, etc, the money in the company cannot be freely taken out of the business without any repercussions.

There are several ways to take money out of the business, but each one needs to be planned in order to avoid the government accusing you of stealing money from your own business.

There is an account that is often referred to as “Shareholder Loan” or “Shareholder Advance” that tracks the money put into and taken out of the business by the shareholder. It is essentially a loan that the shareholder has with the business. When the company owes the owner money, there is no issue. However, when the shareholder owes the company money, it CAN turn into an issue because you have essentially taken out money without paying tax on it.

If the Canada Revenue Agency discovers that you have taken out this money from your company, they will hit you with severe penalties. Usually they will deny the deduction from the company and add the benefit to the shareholder’s personal return, resulting in double taxation.

One way to properly take money out of the business as the owner it to pay yourself a salary. This means setting up a payroll account, paying the proper source deductions and issuing a T4 slip for employment income. An advantage to this method is that taking a salary from your business helps build your RRSP room. A salary is also included as a business expense on the income statement, which helps to reduce the bottom line and therefore the tax paid by the corporation.

Another method is to issue a dividend. This method will reduce the retained earnings in the business. When you get a dividend, it means that instead of a T4 slip, you will issue a T5 slip to declare the dividend income on your personal tax return.

Another mistake shareholder’s often make is to move out investments held in the company to be held personally. Again, this is viewed as a shareholder taking an asset (the investments) from the company and enjoying a personal benefit as now the individual shareholder holds the investments that were previously company property.

If you want to move the investments to a personal account, that is fine as long as it is done properly and with all the tax implications of it considered.