You run your business well. You're an expert in your field and have the right people working for you. However, you may have some questions when it comes to specific accounting strategies for your corporation – from retained earnings to eligible dividends. Our in-house tax experts collaborate with your accounting and legal team to determine the right path for you and your business.
As a small business owner, it is not uncommon to have a bad year. You may be looking for solutions to help soften the burden of this particular year and ask if you are eligible for any tax breaks? A loss carryback may be able to help you.
Capital Dividends Accounts
As the owner of a corporation, you must keep track of everything that goes on inside your business. However, it is often difficult to keep a pulse on everything. Tools are available to help keep things in order.
Common Accounting Questions Business Owners Ask
What are retained earnings?
Simply put, retained earnings are the cumulative total of annual earnings incurred by your company after you have paid all of your expenses (including income tax on those earnings) and distributed any dividends.
As your business flourished over the years and you've earned profits, you most likely have left money in your company. The money that remains in the company and is not paid out as dividends are retained earnings, meaning you have options in the future for dividends, investments, share buybacks and more.
If you've kept track of your finances, calculating retained earnings is easy. The retained earnings formula is as follows:
Current Retained Earnings + After-Tax Profits (or – Losses) – Dividends Paid = Retained Earnings
What are dividends?
When your business does well, and you are satisfied with how much money you are re-investing into your business, you can pay out a portion of your retained earnings to your shareholders as a dividend.
There are two categories of dividends: eligible dividends and non-eligible dividends (also called ineligible dividends). Canadian eligible dividends depend on the corporate status of the company.
Are dividends taxable?
Yes, both non-eligible and eligible dividends are taxable. Any income that your business has generated that is taxed at a higher rate can be paid as an eligible dividend. However, any business income that has been taxed at the lower rate, or small business rate, will be paid as an ineligible dividend.
What is a non-eligible dividend?
If you're a Canadian corporation, public or private, and pay dividends to your shareholders from either business income taxed at the lower rate or from investment income earnings, your shareholders would be receiving non-eligible dividends. These non-eligible dividends are subject to a higher rate of personal tax than eligible dividends. Non-eligible dividends are also referred to as:
- Ineligible dividends
- Regular dividends
- Small business dividends
- Ordinary dividends
Strategies for Retained Earnings
Consider the options to minimize penalties for keeping money in the company.
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