What Should You Do With Surplus Cash?

10 key decisions for business owners

Key decision 3 – What should you do with surplus cash?

If you are the owner-manager of a private Canadian corporation and have surplus cash accumulating in your company, you may be wondering whether to retain the funds in the company or withdraw them while paying as little tax as possible. If so, there are a number of questions you should consider before you take action.

Is there a business need for the cash?

When you realize that you have surplus cash in your corporation, ask yourself if you will need it for business purposes in the short term. Will you need to use the cash to pay installments of income tax or GST/HST? Does your business experience seasonal slow periods when cash flow will need to be supplemented? Consider whether you will have to pay down debts or make any major purchases in the near future.

If you have excess cash that won’t be used for business purposes, the investment income earned on this surplus cash may be taxed at the corporate investment tax rates, which are slightly higher than the top personal tax rates.

Do you need the surplus cash for personal purposes?

Do you have personal expenses coming up, such as income tax installments that must be paid on time? You may also be considering a major purchase like a vacation property or planning to help out with a family member’s education costs, wedding expenses or house down payment. If you know you will need to withdraw surplus funds from the corporation to meet these personal expenses, consider when you will need the funds. It’s important to understand the tax consequences of making the withdrawal and whether it will be possible to make several withdrawals over a period of time to minimize tax costs.

What are the funds going to be used for?

If you don’t need the surplus funds immediately for business or personal purposes, what are your reasons for moving funds out of the corporation? A good starting point is to analyze your longer-term goals, which could include:

- Planning for retirement – are you going to use the funds for your retirement by contributing to a Registered Retirement Savings Plan (RRSP), Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA)?

- Estate planning – do you want to enhance the value of the estate you will pass on to your family? Many potentially effective estate-planning strategies involve insurance-based solutions. The funds may grow on a tax-sheltered basis and may be accessed at retirement to supplement retirement income and/or paid out tax-free on death.

- Asset preservation – if you want to mitigate the risk of funds being subject to claims from corporate creditors, consider transferring excess cash to a holding company. There are various ways to accomplish this.

Note that keeping excess investments or an insurance policy in a corporation may disqualify your shares as qualifying small business shares so that the capital gains exemption may not be available. One alternative is to implement these strategies within a properly structured holding company.

Withdrawing funds from the corporation

If you’ve decided to take funds out of your corporation, consider potential strategies that could help you make the withdrawal and minimize the tax consequences.


Scott Donovan, B.A. | Investment Advisor | RBC Dominion Securities Inc. |

T. 519-747-0133 | F. 519-747-1808 | 95 King Street South, 3rd Floor | Waterloo, ON N2J 5A2 |


This article is supplied by Scott Donovan, an Investment Advisor with RBC Dominion Securities Inc. Member-Canadian Investor Protection Fund. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.