How to take money out of your professional corporation

If your corporation has a seven-figure balance and you are inside ten years of stopping work, this is the planning that matters most. The deferral you built is only worth what you keep when it comes out.

The six routes out

Every dollar leaves a professional corporation by one of six routes, and each has a different cost.

Salary is deductible to the corporation, so it reduces active business income before the small business rate applies. It creates RRSP room, requires Canada Pension Plan contributions from both you and the corporation, and needs a payroll account.

Non-eligible dividends come out of income taxed at the small business rate. They are grossed up and carry a dividend tax credit, and they cost you more personally than eligible dividends.

Eligible dividends come out of the general rate income pool, the balance created when the corporation earns income taxed at the general rate of 26.5 per cent. They are taxed more lightly in your hands. Ironically, a corporation that has lost part of its small business limit to the passive income grind builds this pool faster.

Capital dividends come out of the capital dividend account. Received free of tax, provided the account has a positive balance and the corporation files the election on Form T2054 (Canada Revenue Agency).

Shareholder loan repayments return money you actually lent the corporation. No tax, because it was already taxed when you earned it. Keep the loan account documented, because CRA will ask.

Paid-up capital can be returned to you without tax up to the amount originally invested. Usually a small figure in a professional corporation, and worth confirming rather than assuming.

How the capital dividend account works

This is the route most people have heard of and few use properly.

When your corporation realises a capital gain, half of it is taxable and half is not. The non-taxable half is added to the capital dividend account. Life insurance proceeds received by the corporation, less the policy's adjusted cost basis, are also added.

The inclusion rate remains one-half. The proposed increase to two-thirds was cancelled on 21 March 2025, so pages still describing a two-thirds rate are out of date.

The election is made by filing Form T2054 by the day the dividend becomes payable, or the day any part of it is paid if that is earlier, with a certified copy of the directors' resolution and a schedule showing the account balance (Canada Revenue Agency). An election filed late or for more than the balance triggers a penalty tax, so this is a step your accountant should time, not you.

The order that usually works

Take the free routes first, in the years you can. Capital dividends, shareholder loan repayments and any return of paid-up capital cost nothing and are limited in size, so use them rather than saving them.

Then fill the lower brackets. A retired physician drawing $90,000 a year of dividends over fifteen years pays far less than one drawing $450,000 a year over three. Spreading the drawdown across brackets is the single largest lever in this whole article.

Then pay attention to refundable dividend tax on hand. The corporation recovers $38.33 for every $100 of taxable dividends it pays, up to its RDTOH balance (Canada Revenue Agency). Paying dividends in a year when RDTOH is sitting unrecovered improves the combined result.

Then consider the spouse. Dividends to a related adult are taxed at the top rate under the tax on split income rules unless an exception applies. The exception most relevant in retirement is that an amount received by your spouse is excluded where you are 65 or older in the year and the amount would have been an excluded amount for you (Canada Revenue Agency).

What happens if you do nothing

Leaving the balance untouched is a decision, and it has a price.

On death you are deemed to have disposed of your shares at fair market value, which can produce tax in your final return, while the assets still sit inside a corporation that has to distribute them to your estate. Handled badly, the same money is taxed twice. Handled with a post-mortem plan drafted in advance, most of that is avoidable, but the plan has to exist before it is needed.

The second cost is annual. Investment income inside the corporation is taxed at roughly 50 per cent in Ontario when earned, with a refundable portion recovered only when dividends are paid. A corporation that never pays dividends never recovers it.

What changes the plan

A practice sale, where the lifetime capital gains exemption, $1,275,000 for 2026 after indexation resumed from the $1,250,000 base, may apply to qualifying shares (Canada Revenue Agency). A move out of Ontario. A serious diagnosis, which brings the deemed disposition on death into view much sooner.

And corporate-owned life insurance, where the death benefit less the policy's adjusted cost basis credits the capital dividend account and lets the estate move money out free of tax. That is a real strategy with a real cost: premiums paid for decades from corporate dollars that could have been invested instead. Ask for both illustrations before you decide.

Capital dividend account (CDA)

A notional account holding the non-taxable half of realised capital gains and certain life insurance proceeds. Dividends paid from it are received free of tax.

T2054

The CRA form electing to treat a dividend as a capital dividend. Due by the day the dividend becomes payable.

GRIP

General rate income pool. The balance that allows a corporation to pay eligible dividends.

RDTOH

Refundable dividend tax on hand. Corporate tax on investment income refunded at $38.33 for each $100 of taxable dividends paid.

Shareholder loan

Money you lent the corporation. Repayment is not income, provided the account is properly documented.

Check the effect of a given draw in the salary vs. dividends calculator, and the cost of leaving the money invested in the corporate vs. personal investing calculator.

What to bring to a 20-minute review

Bring your last T2, the corporation's capital dividend account and refundable dividend tax on hand balances, your shareholder loan balance, and the year you expect to stop practising. Add your spouse's income. Twenty minutes is enough to sketch the drawdown order and tell you which balance to use first.

Book a 20-minute review