There’s cash in the corporation. More than there needs to be. It’s been building for a few years and pulling it out feels expensive, so it sits.
That’s the position we find on most incorporated files, and it’s an entirely reasonable place to end up. Nobody’s done anything wrong. It’s just that the decision keeps getting deferred, and deferred decisions have a habit of getting made for you eventually, usually by a sale or a death, at the worst available rate.
The useful question isn’t how much is in there. It’s which door it comes out of.
Four doors
Take the same dollar sitting in the corporation and walk it out four different ways. BC 2026 combined top rates.
Salary or bonus. Taxed in your hands at up to 53.50%. It’s deductible to the company and it creates RRSP room, which the others don’t. It also attracts CPP.
Non-eligible dividend. Up to 48.89% at the top. No RRSP room, no CPP, no deduction for the company.
Eligible dividend. Up to 36.54%, if the company has the general rate income pool to pay one. Most professional corporations paying tax at the small business rate don’t, which is exactly why this door is narrower than it looks.
Capital dividend from the CDA. Nil. Tax-free in your hands, if there’s a credit in the capital dividend account to pay it from.
Same money. Same company. Four doors, and the spread between the widest and the narrowest is the whole of it.
Where the CDA credit comes from
That last door is the one most people have never heard of, so it’s worth explaining rather than just naming.
The capital dividend account isn’t a bank account. It’s a notional tally the CRA keeps of amounts your corporation received that were never taxable. The non-taxable half of a capital gain goes in. So does the death benefit of a corporately-owned life insurance policy, less the policy’s adjusted cost basis.
Whatever’s in that tally can be paid out to shareholders as a capital dividend, tax-free.
That’s not a loophole and it isn’t clever planning. It’s the tax system acknowledging that money which was never taxable inside the company shouldn’t become taxable on the way out.
But you have to know the account exists, you have to have put something in it, and the election has to be filed properly and on time. Most of the corporations we look at have a CDA balance of zero, not because they shouldn’t, but because nobody was ever tracking it.
Why this doesn’t get looked at
Same reason as most things. It falls between desks.
Your accountant files the T2. Their job is the return that’s due. Your advisor manages what’s in the investment account. Their job is the growth. Whether the money should be in the corporation at all, and how it eventually gets to you, is nobody’s file.
It’s also genuinely a two-hat question. You can’t answer it from the investment side without reading the corporate return, and you can’t answer it from the tax side without knowing what coverage is in place and who owns it. That’s a fairly narrow overlap, and it’s the reason we do both.
The passive income problem sitting underneath
There’s a second thing happening while the cash sits.
Investment income earned inside a Canadian-controlled private corporation is taxed at around 50.67% in BC. Part of that is refundable when dividends are paid, so the headline overstates the real cost, but it’s a genuinely unfriendly rate to be earning at.
And passive income above a threshold starts grinding down the company’s access to the small business rate on its active income. So the pile of cash isn’t just sitting there being taxed inefficiently. It can also quietly raise the tax on the work you’re actually doing.
That’s the argument for having an exit plan rather than a balance. Not urgency, not a product. Just a plan that exists.
What we’d do first
Three things, in this order, and none of them cost anything.
Ask your accountant what your capital dividend account balance is. If the answer takes more than a minute to find, that’s useful information on its own.
Find out how much of the corporate cash is genuinely surplus, as opposed to working capital you’ll want back in eighteen months. Those are different piles and they deserve different answers.
Then look at what would happen to the whole thing if you died tomorrow. The shares are deemed disposed of at fair market value, the RRSP or RRIF gets added to income on the final return, and the property that isn’t your principal residence gets taxed on the gain. Canada doesn’t have an estate tax, which people find reassuring right up until they see the final return.
That number exists today. Almost nobody has been shown theirs.
The honest version
Sometimes the answer is that your structure is already doing what it should, and the right advice is to leave it alone. That happens more often than people expect, and we’d rather say so in fifteen minutes than take six meetings to get there.
But if the corporate cash has been growing for three years and nobody has told you which door it’s coming out of, that’s not a plan. That’s a decision waiting to be made under worse conditions than today’s.
We’ve been reading corporate returns since the early nineties. Pull your last two T2s out and have a look at the retained earnings line. If it’s been climbing and nothing’s changed, that’s the conversation.