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

comptable0421 · ‎April 11, 2022

Question the same as the title.

Thank you for your time.

Ryan Li

janisbossenberry · ‎April 13, 2022

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.

View solution in original post

janisbossenberry · ‎April 12, 2022

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 · ‎April 13, 2022

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 · ‎April 13, 2022

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.