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As I understand it, it is possible for people who own their own corporation/small business to pay themselves through dividends. Since they own 100% share in the business they receive 100% dividends.

Could a person funnel the "shares" of their own business into their TFSA (what would the value per "share" be and how many shares do they own) and receive their dividends tax free?

Would they have to make their corporation publicly traded for this to work or are there some special rules disallowing this?

  • 2
    Interesting question. On the surface, I would think that, at the very least, structuring things in that way might run afoul of the General Anti-Avoidance Rule (GAAR). But, I might be wrong, and it's a good question. I'd like to know too what other regulations might prevent that. – Chris W. Rea Jun 27 '13 at 21:24
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Paying yourself through a corporation requires an analysis of a variety of issues.

First, a salary paid to yourself creates RRSP contribution room as well as CPP contributions. Paying yourself a dividend achieves neither of those.

By having a corporation, you will have to file a corporate (T2) tax return. The corporation is considered a separate legal entity from you. As an individual, you will still need to file a personal (T1) tax return.

Never just "draw" money out of a corporation. This can create messy transactions involving loans to shareholders. Interest is due on these amounts and any amounts not paid within one calendar year are considered as wages by Canada Revenue and would need to be reported as income on your next T1 return.

You should never withhold EI premiums as the sole owner of a corporation. You are considered exempt from these costs by CRA. Any amounts that have been remitted to CRA can be reclaimed by submitting a formal request.

The decision on whether to take a salary or dividends normally requires some detailed analysis. Your accountant or financial advisor should be able to assist in this matter.

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I did a little research and found the eligible investments for TFSAs. In this document under heading "Shares of private and other corporations", sub heading "Shares of small business corporations" there is clause about owning less than 10% share and less than $25000 total value of the corporation.

Generally, a connected shareholder of a corporation (as defined in subsection 4901(2) of > the Regulations) at any time is a person who owns, directly or indirectly, at that time, 10% or more of the shares of any class of shares of the corporation or of any other corporation related to the corporation. However, where
• such a person is dealing at arm's length with the corporation or any other related corporation; and
• the aggregate cost amount of all shares of the corporation or any other related corporation the person owns, or is deemed to own, is less than $25,000

that person will not be a connected shareholder of the corporation.

For purposes of the 10% and $25,000 tests, the rules in the definition of ìspecified shareholderî in subsection 248(1) apply with the result that certain shares will be deemed to be owned by the shareholder. For example, by virtue of paragraphs (a) and (b), respectively, of that definition, an annuitant, a beneficiary or a subscriber under a plan trust is deemed to own the shares owned by a person with whom the annuitant, beneficiary or subscriber is not dealing at armís length, as well as the shares owned by the plan trust.

In addition, any share that

• the annuitant, beneficiary, or subscriber under a plan trust; or

• a person not dealing at arm's length with any of the above

has a right to acquire is also included in the calculation of the percentage and cost amount of the shares held for purposes of the 10% and $25,000 tests pursuant to subsection 4901(2.2) of the Regulations.

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