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Let's say I have a small business that has been in operation for 10 years and it no longer makes any money. I've told all my customers that we will no longer take on any new business. So for the rest of the fiscal year, there will be no revenue and there will be negligible expenses. There's about $50k in cash and $100k of accounts receivable that were accumulated from previous years (ie. tax has already been filed for these assets in previous years, and do not contribute to taxable income as of today and the future). The business operates in Ontario, Canada.

As the only shareholder and owner of this small business, how should I "cash out" of my business so that I have money to start a second one? Should I pay myself a $150k salary that would be subject to the personal taxes? Or am I allowed to pay myself a $150k dividend out of the retained earnings (which I'm guessing won't be taxed)? SOmeone told me it is illegal to pay myself a $150k dividend when the company isn't making money?

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    If you dissolve the company then it necessarily has to distribute remaining fund to its shareholders (you). This might be treated as a "return of capital" if you had invested your own money in founding the company, or a dividend if it has grown beyond your investment. You might get some anecdotal answers here but I think you'd be better off consulting a qualified accountant.
    – CactusCake
    Commented May 7, 2018 at 18:22
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    Does your corporation actually have $150K of retained earnings properly accounted for?
    – Chris W. Rea
    Commented May 7, 2018 at 23:57
  • With such sums involved, you should not rely on strangers on the internet. Seek a tax adviser who is proficient in Canadian tax law and held accountable for the advice he gives.
    – Daniel
    Commented May 8, 2018 at 7:58
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    You definately need an accountant + lawyer, as there are tax & legal questions involved. Your Adjusted Cost Basis + Paid Up Capital of shares being redeemed will necessary to determine how much of the final payment would be dividends vs return of capital vs capital gains, and your retained earnings [from a tax perspective + from an accounting perspective] could impact things as well. It will cost you probably 5k+ to get this resolved by an accountant + lawyer, but will likely be well worth it.
    – Grade 'Eh' Bacon
    Commented May 8, 2018 at 15:52

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When your company shuts down, you don’t pay salaries or dividends anymore, you sell up and return the money to the shareholders.

First you pay back everything you owe, including loans from shareholders (investment in the company that gave you shares is not a loan). Then you pay back the money that the shareholders invested, that is tax free because they just get their money back. Whatever is left is divided between the shareholders and must be taxed, but not as income.

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    Can you cite a reference for giving the shareholders back their initial capital (untaxed) and then paying the rest separately and it being taxed?
    – DJClayworth
    Commented May 7, 2018 at 20:36

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