If you run an incorporated business in Canada, then cash flow just might be one of those things that keeps you up late at night. You can be profitable on paper and still feel squeezed, and a big part of the reason is how your corporation is actually set up. A lot of businesses don’t realize that the way you structure your corporation can either improve cash flow or work against it.
The encouraging part of this is that a few thoughtful structural choices can make a big difference. So let’s take a look at the main things you can do, so that more of your money stays where it’s useful, which is inside your business and working for you.
Why Your Corporate Structure Affects Cash Flow
Before we get into the specifics, it helps to understand why this matters so much in the first place.
Your structure shapes when and how your profit gets taxed, and tax is one of the biggest cash outflows that most businesses face. The timing of those payments, the rate that you pay, and the way that money moves between you and your company all come down to how things are set up. So when your structure is working well, you hold onto cash longer and you have more of it available when you actually need it. This is really what good cash flow management is all about, and it starts with the foundations of your corporation.
Use the Small Business Deduction to Improve Cash Flow
One of the most powerful tools that you have at your disposal is built right into the Canadian system…the small business deduction.
For a Canadian-controlled private corporation (CCPC), the first $500,000 of active business income is taxed at the lower small business rate, which is 9% federally plus a provincial rate on top, and you can see the current figures on the CRA’s corporation tax rates page. Income above that $500,000 limit is taxed at the higher general rate of 15% federally. Because the small business rate is so much lower, keeping more of your profit in the company at that rate is one of the easiest ways to improve cash flow.
This is also a form of tax deferral, since the money that you don’t pay out personally isn’t taxed at higher personal rates right away. It stays in the business, where it can fund payroll, inventory, or your growth.
How a Holding Company Can Improve Cash Flow
Once your business is generating more cash than you need for day-to-day operations, a holding company structure can be a smart next step.
Here’s the basic idea. Your operating company earns the profit, and then it pays surplus cash up to a holding company as a dividend. When two Canadian corporations are connected, which generally means that one owns at least 10% of the other by vote and value, those intercorporate dividends can move tax-free under section 112 of the Income Tax Act. So you can shift extra cash out of your operating company without triggering personal tax, and that can be a significant bit of tax deferral.
A holding company also adds a layer of protection, because the cash and assets that are sitting in the holding company are generally separated from the risks of the operating business. This isn’t the right move for everyone, since there are setup and ongoing costs involved, but for a profitable business it can be a great way to manage a surplus of cash.
Depending on what your long-term goals are for your Active business, and future plans to invest, it is often wise to consider a holding company be put in place at the outset of incorporation of your operating company. Otherwise, if you do wait to insert a holding company after your business has been active, you most likely will need to complete a section 85 rollover as part of installing a holding company overtop of a pre-existing operating entity. This is a very crucial step that needs to be planned out with your CPA, as the CRA will deem a sale at Fair market value, which can have adverse tax consequences if the appropriate tax steps are not completed first.
Time Your Owner Compensation Around Your Cash Flow
How and when you pay yourself is another factor that has a direct effect on your cash flow.
Most owner-managers take some mix of salary and dividends, and the timing of each one is very important. Salary is a deductible expense for the company and it comes with payroll remittances, while dividends don’t reduce corporate tax but can be more flexible on timing. By planning your pay around when the business actually has cash, rather than just putting it on autopilot, you can avoid draining the company at the wrong moment. This is where a bit of corporate tax planning can really pay off, because timing your pay thoughtfully can improve cash flow on both the corporate and the personal side.
Choose a Fiscal Year-End That Supports Your Cash Flow
A lot of owners don’t realize that they can choose their corporation’s fiscal year-end, and this one decision can really help your cash flow.
Picking a year-end that lines up with your slower season, for example, can spread out your reporting and payment deadlines so that they don’t all land at your busiest time. It can also push some of your tax further down the road, depending on when your income is recognized. On top of that, an eligible CCPC that qualifies for the small business rate usually gets three months to pay its balance of corporate tax instead of two, according to the CRA’s balance-due rules. That’s one extra month of breathing room, and every bit really does make a difference.
Stay Ahead of Tax Instalments and Remittances
Few things hurt cash flow more than a surprise tax bill, which is why staying ahead of your tax instalments and remittances is so important.
Many corporations have to pay their corporate tax in installments throughout the year rather than in one lump sum. Eligible small CCPCs that have a clean compliance history can often pay quarterly instead of monthly, and the CRA’s instalment rules spell out who qualifies. Quarterly payments are usually gentler on your cash. The same goes for GST/HST and payroll source deductions, which need to be set aside and remitted on time. When you plan for these payments instead of reacting to them, you smooth out any bumps, and getting this right is a great way to improve cash flow.
Common Cash Flow Mistakes to Avoid
When you’re tuning up your structure, there are a few common slip-ups that you may need to steer around.
The first is treating tax as an afterthought and getting caught short at the balance-due date. The second is leaving surplus cash exposed in the operating company when a holding company would protect it. The third is forgetting that passive investment income over $50,000 can start to chip away at your access to the lower small business rate, which can raise your corporate tax and tighten things up. Keeping an eye on your small business cash flow throughout the year, rather than only at year-end, is going to help you catch these issues early.
Building a Structure That Supports Your Cash Flow
There isn’t one perfect structure that fits every business, and that’s completely fine. The right setup depends on how much profit you’re making (it helps to know how much your business can earn before tax really takes a bite), how much cash you need personally, and where you want to take the business next. For many owners, the answer is a combination of these moves, fine-tuned a little each year as part of your year-end planning.
What matters most is being intentional about it. A structure that’s designed to improve cash flow gives you more room to invest, deal with surprises, and grow on your own terms.
How Strata-G Can Help
Getting your corporate structure right is a lot easier with an experienced partner in your corner, and that is where Strata-G can make a difference.
Strata-G is a Canadian virtual accounting firm that works with businesses, so corporate tax and cash flow management are what we focus on every day. We help owner-managers with corporate tax planning, holding company setups, payroll, installment planning, and the year-end strategy that ties it all together, so that more of your profit stays in the business where it belongs.
If you’d like a clear, customized plan to strengthen your cash flow this year, then Strata-G is ready to help. Contact us today to get started, or learn more about our corporate accounting services.
