Canadian Controlled Private Corp: move retained earnings tax efficiently

[blackspot0]

Hi all!

I'm a Canadian citizen, Canadian tax resident, and a single guy. Neither myself not the company owns any real property.
I have a CCPC small business. I am the only shareholder and employee. It has about 500k in retained earnings. I currently pay myself as little as possible via dividends, basically all my savings are in the companies retained earnings. I have about 10k in a RRSP.

I want to leave the country and wind the company down, and I'm trying to figure out the best way to do it. Ideally I'd like to (eventually) put that 500k into an investment structure (bonds / stocks), and find a low cost country to use that passive income to live off of.

To get the money out of the company I can't take the lump sum of the 500k in a dividend, it would be about 195k in tax. If the company just buys bonds, it's around 50% tax. If I move away then the company becomes non-resident controlled, and dividends are subject to 25% WHT, unless there is a tax treaty maybe. I thought of a shareholder loan, but I don't think that gains me anything.

For countries I'm thinking of moving to Belize under the QRP, and maybe travel around the world during rainy season. But I'm open to options.

This is what I am thinking, maybe it's flawed or there is a better way:
Keep the cash in the company. Move. Get tax residence abroad somewhere, file to the CRA to remove my Canadian Tax Resident status. Maybe move again to break the interim countries tax residence, and become tax-resident nowhere? Setup a company somewhere. Start a R&D project, mainly laptop work. User transfer pricing to move the 500k out of the company over maybe 3-5 years. Use a loss carry-back to offset prior years corporate taxes for some additional savings. When retained earnings go to zero, shut the Canadian company down.

Or I'm missing something obvious. Corporate continuance abroad?

Wait: Lifetime capital gains exemption of 1.25 million. So I should be able to wind up the company and just claim it against the LCGE? And since I'd be leaving with only cash, there should be no exit tax for me personally?

 

[Forester]

Have you already consulted some smart Canadian tax advisor? Optimally from your province. This is really not a simple and easy task, TBMK. As you probably know, CRA is fairly hungry.

 

[blackspot0]

I'm near the bottom of the learning curve at this point. I need to be able to understand what a tax advisor is actually recommending. That will certainly be a part of the equation at some point.

 

[YoungLansk]

Find an offshore company that Would invoice you for the Amount And pay you Back in Crypto ( -%) .. Might not be super legal but Doable.
Take the crypto and partake in LPs or Stake it. Although not sure 500k would be enough to make any good income to live comfortably. This is not a Finical advice obviously

 

[Forester]

I'm near the bottom of the learning curve at this point. I need to be able to understand what a tax advisor is actually recommending. That will certainly be a part of the equation at some point.

Well, it's a good intention to educate yourself a bit before engaging a tax advisor.
Nevertheless, a smart tax advisor will inform you using words that you definitely will understand – otherwise he's not smart And do not believe that it is possible to learn from the public sources in a few weeks all the tricks that tax advisor learned in years and in the different environment (my personal experience )

 

[JimBeam]

put that 500k into an investment structure (bonds / stocks), and find a low cost country to use that passive income to live off of.

Sorry to break it down on you, but you can't live almost anywhere (livable) off the 500k invested.
Let's say you get 5% return that's 25k. Even if it's possible to live of only a 25k/year, can you sustain 5% return/draw rate?

And that's under the condition you get all the money (without paying any tax on that might take you down to 450k or 400k).
It's a great amount of money for a fresh start somewhere else, though.

 

[WorldCitizen99]

Hi all!

I'm a Canadian citizen, Canadian tax resident, and a single guy. Neither myself not the company owns any real property.
I have a CCPC small business. I am the only shareholder and employee. It has about 500k in retained earnings. I currently pay myself as little as possible via dividends, basically all my savings are in the companies retained earnings. I have about 10k in a RRSP.

I want to leave the country and wind the company down, and I'm trying to figure out the best way to do it. Ideally I'd like to (eventually) put that 500k into an investment structure (bonds / stocks), and find a low cost country to use that passive income to live off of.

To get the money out of the company I can't take the lump sum of the 500k in a dividend, it would be about 195k in tax. If the company just buys bonds, it's around 50% tax. If I move away then the company becomes non-resident controlled, and dividends are subject to 25% WHT, unless there is a tax treaty maybe. I thought of a shareholder loan, but I don't think that gains me anything.

For countries I'm thinking of moving to Belize under the QRP, and maybe travel around the world during rainy season. But I'm open to options.

This is what I am thinking, maybe it's flawed or there is a better way:
Keep the cash in the company. Move. Get tax residence abroad somewhere, file to the CRA to remove my Canadian Tax Resident status. Maybe move again to break the interim countries tax residence, and become tax-resident nowhere? Setup a company somewhere. Start a R&D project, mainly laptop work. User transfer pricing to move the 500k out of the company over maybe 3-5 years. Use a loss carry-back to offset prior years corporate taxes for some additional savings. When retained earnings go to zero, shut the Canadian company down.

Or I'm missing something obvious. Corporate continuance abroad?

Wait: Lifetime capital gains exemption of 1.25 million. So I should be able to wind up the company and just claim it against the LCGE? And since I'd be leaving with only cash, there should be no exit tax for me personally?

I just faced this very issue

I have bad news for you. Regardless of whether the money in your company is in cash or investments, the exit tax applies to the capital gain on the value of the shares. As an example, if share capital was 100 dollars, and your company is worth 500K whether stocks or cash, that's a capital gain of 499,900 and exit tax of 53.5% on the taxable portion will apply. That used to mean an effective tax rate of 26.7%. Unfortunately, since June the capital gains inclusion rate increased from 50% to 66.7%. The first 250K of a cap gain for individuals is still at 50%, but corporations do not have this exemption. So for corps, it is now 53.5% x .667 = 35.7% or 179K tax on the FMV of your company. That leaves 321K. Assuming you change your tax residency properly (which is a whole other huge topic) the company then becomes a non-CCPC.

Now, that is just the exit tax. The money is still in the company. The next challenge is to figure out how to take the money out of the company at the best rate. For dividends, the best treaty rate is 15%. If the dividends were being paid to a foreign company that owned at least 10% of your Cdn corp then you could withdraw it at 5% for some treaties but this requires expert planning. So at 15%, that's another 48K which leaves 273K. That just the withholding tax that Canada will keep for itself before the money gets to you. If you go to a non-treaty country, it is 25%.

You then have to figure out how your destination country will tax the dividends from your non-CCPC. If you go to a place that taxes you on worldwide income and there is a treaty in place, you will often be able to claim tax credits with your new country for tax already paid to Canada. If your personal tax rate on dividends in the new place is lower than 15%, you should be fine but if it is higher than 15%, you'll pay the difference to your new country. Some countries give credits even without a treaty.

There is a way to get the money out of your company at cap gains rates instead of dividend rates before you leave- it is called a surplus strip. But it costs a lot to do. You can talk to a lawyer to see if it is worth it for you. With only 500K and the new law, I'd say you'd probably just break even.
If you can use the LCGE then definitely do it prior to departure. Not every corp is eligible -there are specific requirements to use it.
If you can get the cash into your personal possession rather than corporate, you won't pay exit tax on it.

You have to run the numbers and see whether it is better to take it all out before departure, or just leave, pay the exit tax and then use the treaty rate. It's a lot more complicated and expensive than you think. You haven't factored in accounting and legal fees in both countries in order to pull it off so it goes smoothly. I think you would be left with under 250K after everything.

You might be better off staying Canadian tax resident and just letting that money grow inside the corp. Canada penalizes you if you leave the plantation.

It's increasingly difficult to claim tax residency nowhere anymore.
Also transfer pricing falls under Anti-avoidance measures in many places.


Hope that helps
*I'm not a financial professional. This is not financial advice, just my researched opinon.