Getting wealth out of the corporation.

01Two layers of tax, by design

A corporation pays tax on what it earns. When that money later moves to you, you pay personal tax on it again. Canada’s system is built so that the two layers roughly add up to what you would have paid had you earned the income personally. Tax practitioners call this integration. In practice it is never perfect, and the gaps, in both directions, are where planning lives.

The first layer is light. An Ontario Canadian-controlled private corporation pays a combined 11.2% on its first $500,000 of active business income, following the 2026 Ontario Budget’s cut to the provincial small business rate effective July 1, 2026 (it was 12.2% before; a tax year that straddles that date gets a prorated rate, about 11.7% for a December 31, 2026 year-end). The $500,000 limit is shared among associated companies. Active income above it is taxed at 26.5%. The second layer depends entirely on how the money comes out.

Why the company is where wealth compounds

The gap between the two layers is the reason most owners leave money in the company. Keep $100,000 of active business income inside the corporation and $88,800 remains to invest. Earn the same $100,000 personally at the top rate and $46,470 remains. That difference is a deferral, not a saving. The second layer is still owed when the money comes out, but the deferred tax compounds in the meantime. In fact, at the top bracket, small business income that is later paid out as a non-eligible dividend bears slightly more combined tax than the same income earned personally: about 53.6% in 2026 and 54.6% from 2027 (at the 11.2% corporate rate), against 53.53%. The advantage is the time the money spends invested, not the rate.

The question is never whether the second layer is paid. It is when, at what rate, and through which door.

02The ways money leaves a company

There is no single best route. Each exit carries a different rate, a different side-effect and a different tax account inside the company. The order in which they are used is a large part of the plan.

Personal rates shown are 2026 Ontario top combined rates. Sources below.

Salary and bonus

Salary is deductible to the corporation and taxed to you as employment income. It is the least efficient route at the top bracket, but it is the only one that creates RRSP contribution room and Canada Pension Plan entitlement, which is why many plans pay at least some salary.

Taxable dividends: eligible and non-eligible

Dividends are paid from after-tax corporate income and are not deductible to the company. Income that was taxed at the general 26.5% rate can generally be paid as an eligible dividend, taxed at 39.34% at the top bracket; the company tracks this capacity in its general rate income pool (GRIP). Income taxed at the small business rate comes out as a non-eligible dividend, taxed at 47.74% in 2026 and 48.89% from January 1, 2027.

Capital dividends: the tax-free door

The capital dividend account (CDA) is a notional account that collects amounts the company received tax-free: chiefly the non-taxable half of capital gains, and life insurance death benefits in excess of the policy’s adjusted cost basis. Paid out with an election filed with the Canada Revenue Agency, a capital dividend is received tax-free by Canadian-resident shareholders. The election must be filed by the earlier of the day the dividend is paid and the day it becomes payable, and electing more than the account holds triggers a penalty tax unless it is corrected, so the balance should be confirmed first. Because later capital losses reduce the account, a positive balance is generally best paid out rather than left to sit.

Return of paid-up capital

Money you originally invested in the company’s shares can usually be returned to you tax-free, up to the shares’ paid-up capital. For most owner-managed companies this is small. It can be larger where shareholders contributed significant capital, though the tax rules often limit the paid-up capital created in a reorganisation, so it should be confirmed with your accountant before it is relied on.

Shareholder loans

Borrowing from your own company is not a way around the second layer. A loan to a shareholder is generally added to the shareholder’s income unless it is repaid within one year after the end of the corporation’s taxation year in which it was made, and is not part of a series of loans and repayments. An amount included this way is taxed as ordinary income, at up to 53.53%, not as a dividend. Even a loan that is repaid in time can create a taxable benefit for interest at the CRA’s prescribed rate if it is interest-free or below that rate.

A sale of the shares

Selling shares produces a capital gain, half of which is taxable, for a top rate of 26.76%. Owners of qualifying small business corporation shares may shelter gains with the lifetime capital gains exemption: $1.25 million for sales on or after June 25, 2024, indexed to inflation from 2026 ($1,275,000 in 2026), less any exemption already used. Qualifying is not automatic. At the time of sale, 90% or more of the company’s assets must be used in an active business, and more than 50% throughout the previous 24 months, during which the shares must not have been owned by anyone other than you or a related person. Surplus cash and investments can quietly fail these tests. A large claim can also trigger alternative minimum tax.

03Family members and the split-income rules

Paying dividends to a spouse or adult children in lower brackets was once routine. Since 2018, the tax on split income (TOSI) rules tax most such dividends at the top personal rate, unless the family member qualifies for an exclusion. The main ones:

• Actively engaged. The family member works in the business on a regular, continuous and substantial basis, in the current year or in any five prior years. An average of at least 20 hours a week is a safe harbour.
• Excluded shares. A shareholder aged 25 or older who directly owns at least 10% of the votes and value of a company that is not a professional corporation, earns less than 90% of its business income from services, and does not derive substantially all of its income from a related business. Shares of a holding company that simply receives dividends from the family’s operating company generally do not qualify.
• Owner aged 65 or older. From the year the owner turns 65, where an amount would be excluded in the owner’s hands, the same amount paid to their spouse can also be excluded.

Salary paid to a family member is outside TOSI, but it must be reasonable for the work actually done.

04The cost of leaving too much in

Retained earnings invested inside the company create a separate problem. Under federal rules, once a corporation and its associated companies earn more than $50,000 of passive investment income in a year (technically, adjusted aggregate investment income), the following year’s small business limit shrinks by $5 for every $1 above that threshold. At $150,000 of passive income, the federal small business rate is lost entirely.

Ontario does not apply this reduction to its own small business rate. So active income that loses the federal rate is taxed at a combined 17.2% (15% federal plus Ontario’s 2.2%, from July 1, 2026), not the full 26.5%, and the loss is smaller than it first appears, though still real.

Not every kind of growth counts. Unrealised gains are not passive income until they are sold, so portfolios built around long-term capital growth create less of it each year than interest- or dividend-paying ones. Growth inside an exempt life insurance policy is not included. Individual pension plans and similar arrangements hold investments outside the corporation altogether. Each of these trades one consideration for another, which is why the investment policy inside a company should be written with the tax rules in view.

05Putting it in order

A common order of priorities, always adapted to the company and the family:

1. Use the tax-free doors. Pay out a positive capital dividend account balance. Paid-up capital can also be returned tax-free, though it is sometimes worth keeping for a later redemption or for the estate.
2. Recover refundable tax. Part of the tax the company paid on investment income is refunded when it pays taxable dividends. The refundable tax on interest, rents and capital gains is recovered only through non-eligible dividends. A plan that ignores this leaves money with the government.
3. Pay the right kind of dividend. Use eligible dividends where the company has the pool for them, and watch the timing of non-eligible dividends around the January 1, 2027 rate change.
4. Decide on salary deliberately. Pay it for the RRSP room and pension entitlement it creates, not by habit.
5. Involve family members only within the rules.
6. Plan the final exit. Eventually every share is sold or deemed sold at death. See the tax bill at death and how corporate-owned insurance can move retained earnings to the family through the capital dividend account.

06Questions to bring to your accountant

• What are the current balances in the company’s capital dividend account, GRIP and refundable tax accounts?
• How much passive income did we earn last year, and how close are we to the $50,000 threshold?
• Does our salary-and-dividend mix still make sense, given the 2026 and 2027 rate changes?
• Do our shares qualify for the lifetime capital gains exemption today, and what would put that at risk?
• Are any dividends to family members exposed to the tax on split income?
• What is the plan for the shares when I die?