Corporate Tax Planning Strategies for Canadian Companies with Retained Earnings

If your corporation has been profitable for a few years, you probably have a growing balance of retained earnings and a practical question: should that money stay in the company, be reinvested, or be paid out? The answer depends on your province, your corporate status, your personal tax position and your plans for the business. This guide explains the main strategies for Canadian-controlled private corporations (CCPCs), separates federal Canada Revenue Agency (CRA) rules from provincial and territorial rules, and flags the figures you must verify before acting.

General information only: This article is not tax, legal or accounting advice. Tax rules, rates and thresholds change. Confirm current requirements with the CRA, your provincial or territorial authority, or a qualified Canadian professional before making decisions.

1. Understanding Retained Earnings

Retained earnings are the cumulative after-tax profits a corporation has kept rather than paid out as dividends. They appear in the shareholders’ equity section of the balance sheet (reported on Schedule 100 of the T2 return). They are an accounting measure, not a separate tax account.

For tax purposes, the CRA tracks related balances that determine what happens when money leaves the company:

• General rate income pool (GRIP): determines how much of a dividend can be designated as an eligible dividend.
• Capital dividend account (CDA): allows certain tax-free amounts, such as the non-taxable half of capital gains, to be paid to shareholders as capital dividends.
• Refundable dividend tax on hand (RDTOH): tracks refundable tax on investment income that can be recovered when taxable dividends are paid.
• Paid-up capital (PUC): generally the amount that can be returned to shareholders without a taxable dividend.

Retained earnings matter to shareholder value because they fund growth, absorb downturns and increase the company’s worth. However, cash sitting in the corporation can also create tax complications, which are covered below.

2. The Canadian Corporate Tax System in Brief

Federal framework

Corporations pay federal tax under Part I of the Income Tax Act. The general federal rate is 15% after the federal abatement and general rate reduction. A CCPC earning active business income can claim the small business deduction (SBD), which lowers the federal rate to 9% on income up to the business limit, currently $500,000 federally. Verify the current rates and business limit on the CRA website.

Provincial and territorial taxes

Each province and territory adds its own corporate income tax, with separate small business and general rates and its own small business limit. For example, combined rates in Ontario differ from those in British Columbia or Nova Scotia. Check your jurisdiction’s current rates and limit.

Administration also varies. The CRA collects corporate tax for most provinces and territories on the T2 return. Quebec corporations file a separate CO-17 return with Revenu Québec, and Alberta corporations file an AT1 return with Alberta’s tax authority, in addition to the federal T2.

Sales taxes

GST/HST, PST and QST do not tax retained earnings directly, but they affect how you spend them. Registrants generally claim input tax credits for GST/HST on business purchases, including equipment. In

Disclaimer: The content on this website is AI-generated for informational and educational purposes only. It does not constitute certified financial, tax, or legal advice. Because accounting standards and local tax codes vary frequently, readers should consult a qualified accountant or certified professional before making any financial decisions based on this material.