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comptable0421
Level 2

Can an inactive corporation declare dividends or pay salary/wages?

Question the same as the title.

 

Thank you for your time.

Ryan Li

Solved
Best answer April 13, 2022

Best Answers
janisbossenberry
Level 6

Can an inactive corporation declare dividends or pay salary/wages?

Yes, a common small business "retirement" plan is to accumulate retained earnings (say 250,000 or $500,000) in the corporation.  At the same time, max out RRSP contributions by taking a salary during the working years.  Retire at 55, take $25,000 or $50,000per year out in dividends for 10 years, letting the RRSP compound tax-free.  Then start withdrawing the RRSP at 65.  

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3 Comments 3
janisbossenberry
Level 6

Can an inactive corporation declare dividends or pay salary/wages?

Dividends can only be declared if they have positive retained earnings.  If they have an employee to pay salary/wages to (even if the employee is also a shareholder), I don't think you can say it is inactive.  It may just not have any revenue that year.  If there is no revenue, and no positive retained earnings, paying a salary might not be a wise choice.

comptable0421
Level 2

Can an inactive corporation declare dividends or pay salary/wages?

Hi, good morning,

 

Thanks for your reply.

 

I posed the question since I was examining a special situation (maybe a tax tricky) one may face. Let's look at a simple example. A business man operated 10 years and accumulated 500000 retained earnings, and then planned to retire. If he/she dissolved his/her corporation right away, there would be a lot tax effect in the year. If he/she keeps his/her corporation without doing business but pays out salaries or dividends in 10 years, possibly, the taxes payable are much less compared with dissolving company.

 

Thank you!

Ryan

janisbossenberry
Level 6

Can an inactive corporation declare dividends or pay salary/wages?

Yes, a common small business "retirement" plan is to accumulate retained earnings (say 250,000 or $500,000) in the corporation.  At the same time, max out RRSP contributions by taking a salary during the working years.  Retire at 55, take $25,000 or $50,000per year out in dividends for 10 years, letting the RRSP compound tax-free.  Then start withdrawing the RRSP at 65.