The hidden rule behind “tax-free” corporate dividends that might cost you

One of the most common statements I hear from incorporated professionals is: “I can move money between my corporations tax-free.”

That’s true, but only to a point.

The ability to move money between corporations using tax-free inter-corporate dividends is governed by a technical concept that rarely gets explained clearly: safe income.

And when it’s misunderstood, it can turn a routine corporate transaction into a six-figure tax surprise.

What is “Safe Income”?

Safe income is not a line item on your balance sheet.

It is a tax concept developed by the courts to represent the after-tax business profits that have actually:

• increased the value of your corporation, and
• not yet been taxed personally.

In other words, safe income is the profit your professional corporation earned that made your shares worth more. But this is only the starting point.

“Safe Income” vs “Safe Income on Hand”?

Safe income on hand is the portion of that safe income that:

• still exists today
• has not been paid out as dividends or salary
• has not disappeared due to market losses, write-downs, or poor investments
• still supports the current fair market value of your shares

“Safe Income on Hand” is the amount CRA allows to be transferred between corporations tax-free.

Why This Matters for Incorporated Professionals and Business Owners?

Most incorporated professionals and business owners use holding companies to:

• protect capital
• invest excess cash
• prepare for retirement
• plan for future business sales

Inter-corporate dividends are a powerful planning tool, but only safe income on hand can move without tax. Everything else risks being re-classified as a capital gain under section 55 of the Income Tax Act.

A Real-World Example

Assume your professional corporation has earned:

Item Amount Lifetime after-tax profits $2,000,000 Dividends already paid$(800,000)Investment losses & asset write-downs$(500,000)Value increase that still exists today$700,000

• Safe income: $2,000,000
• Safe income on hand: $700,000

Only $700,000 can be transferred to your holding company tax-free.

Any value beyond $700,000 in this case would not be supported by real corporate value. If cash is transferred via dividend that is above the “safe income on hand”, CRA will treat it as a taxable capital gain.

Key Takeaways

• “Safe income” is what your company has ever earned.
• “Safe income on hand” is what is still there today.
• Only “Safe income on hand” can move tax-free.

Where Problems Arise

This concept becomes critical during:

• estate freezes
• corporate reorganizations
• purification before a qualified small business sale
• extracting retained earnings
• post-mortem or pipeline planning

These are all moments where large sums move, and mistakes here can be costly.

A Final Word

Safe income calculations are not DIY math. They must be prepared by qualified tax accountants. Because when safe income is not properly recorded, the result isn’t a planning inconvenience, it’s often a permanent six-figure tax bill that no amount of hindsight can reverse.

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This information has been prepared by Brandt Butt who is an Investment Advisor and Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor and Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and a business name under which iA Private Wealth Inc. operates.

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