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March 31, 2023

Tax Perspectives

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Please note that these publications may not be up-to-date as taxation matters are subject to frequent changes.

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Winter 2003
Volume 2, Number 1

The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting on the information herein.

Paying Yourself With Capital Gains

By Kim Moody, CA, TEP
Moodys LLP Tax Advisors (Calgary)

In these economic times, capital gains are elusive, yet there is an easy way for business people to create them, and pay themselves at the same time.

Traditionally, owner-managers have taken remuneration either by salary or by dividends. However, with certain structuring, it is possible to withdraw funds from a corporation as a capital gain, instead of a dividend.

There are many reasons why remuneration by capital gains could be beneficial. Firstly, capital gains are taxed at a lower rate than dividends, with the savings ranging from 4% to 9% depending on the province. Secondly, capital gains which are allocated to minor children (possibly via a trust) are not subject to income attribution or to the so-called "kiddie" tax. Therefore, capital gains can be used for income splitting.

Lastly, if you have capital losses, capital gains may be offset against these losses, allowing the gains to be received tax-free.

For the most part, this tax planning is effective in two basic scenarios:

  • For owner-managers with corporations that carry on an active business and have income eligible for the small business deduction.
  • For foreign corporations which carry on an active business, especially if they are established in low tax jurisdictions.

The possibility of receiving remuneration as capital gains should be considered for all owner-managers. While the strategy does involve some complexities, and may have some risks associated with it, the benefits, in our view, can substantially outweigh the costs.