Retained Earnings in a Canadian Corporation: What to Do After Filing Your Corporate Tax Return
What retained earnings mean, how they are created, and the smartest ways to use them after filing your corporate tax return and how incorporated business owners can manage them.
Canadian Corporation’s Retained Earnings. What They Are and How to Use Them After Filing Corporate Tax Returns
One of the biggest advantages of operating through a Canadian corporation—especially a Canadian-Controlled Private Corporation (CCPC)—is the ability to retain earnings inside the corporation. However, many business owners are unclear about what retained earnings really mean, what happens after the corporate tax return (T2) is filed, and how those funds can be used efficiently without triggering unnecessary tax.
This article explains:
What retained earnings are
How they arise after filing corporate taxes
What options exist to use or manage them
Common mistakes to avoid
1. What Are Retained Earnings?
Retained earnings represent the after-tax profits of a corporation that have not been paid out to shareholders as salary or dividends.
In simple terms:
Revenue – Expenses – Corporate Tax = Retained Earnings
These earnings remain inside the corporation and appear on the balance sheet, not the income statement.
Example:
A CCPC earns:
Net business income: $200,000
Corporate tax paid: $25,000
Retained earnings = $175,000
This amount is corporate money, not personal income of the owner—until it is withdrawn.
2. When Do Retained Earnings Become Final?
Retained earnings are formally determined after the corporate tax return (T2) is prepared and filed.
At that point:
Net income is finalized
Corporate taxes payable/refundable are calculated
Financial statements reflect updated retained earnings
Once the T2 is filed, retained earnings can be strategically managed, distributed, or reinvested.
3. What Can a Corporation Do With Retained Earnings?
After filing the corporate return, retained earnings can be handled in several legal and strategic ways.
4. Option 1: Leave Retained Earnings Inside the Corporation (Tax Deferral)
This is the most common strategy.
Why businesses retain earnings:
Corporate tax rates are lower than personal tax rates
Allows tax deferral until funds are personally needed
Improves working capital and liquidity
Common uses:
Business expansion
Hiring employees
Marketing and advertising
Purchasing equipment or assets
Paying down corporate debt
Retaining earnings does not trigger personal tax until funds are withdrawn.
5. Option 2: Pay Dividends to Shareholders
Retained earnings can be distributed as dividends.
Types of dividends:
Non-eligible dividends (most common for CCPCs using the small business rate)
Eligible dividends (from income taxed at the general corporate rate)
Dividends:
Are not deductible to the corporation
Are taxable to the shareholder personally
Must be supported by sufficient retained earnings
Dividends are reported using a T5 slip and T5 Slip has to be submitted to the CRA by Jan-Feb each year for the year prior. i.e. 2025 T5 Slip should be reported to the CRA before end of Feb 2026.
When dividends make sense:
Owner needs personal cash
Lower personal marginal tax rate
No desire to increase CPP contributions
6. Option 3: Pay Salary or Bonuses (Even After Year-End)
A corporation may use retained earnings to pay:
Salary
Management bonuses
Key advantage:
Salary/bonus is tax-deductible to the corporation
Creates RRSP contribution room
Reduces retained earnings
A bonus must be declared within 179 days after year-end to be deductible for the prior fiscal year.
Trade-off:
CPP contributions apply
Personal tax payable immediately
7. Option 4: Invest Retained Earnings Inside the Corporation
Corporations can invest retained earnings in:
GICs
Bonds
Stocks
ETFs
Mutual funds
Important tax consideration:
Passive investment income inside a CCPC can:
Be taxed at high rates
Reduce the Small Business Deduction (SBD) once passive income exceeds $50,000
Many businesses therefore:
Move excess retained earnings to a holding company
Invest personally instead
8. Option 5: Transfer Retained Earnings to a Holding Company
Using a holding company is a common advanced strategy.
How it works:
OpCo pays a tax-free intercorporate dividend to HoldCo
Retained earnings move without triggering immediate tax
Funds are protected from operating risks
Benefits:
Asset protection
Investment flexibility
Estate and succession planning
Cleaner financial separation
This requires proper legal and tax structuring.
9. Option 6: Use Retained Earnings for Insurance & Retirement Planning
Corporations may use retained earnings to:
Fund corporate-owned life insurance (100% Tax Free way to handle retained earnings out of a Corporation)
Support Individual Pension Plans (IPP)
Supplement retirement strategies beyond RRSP limits
This is especially effective for:
High-income owner-managers
Professionals
Incorporated consultants
10. Common Mistakes to Avoid
❌ Treating retained earnings as personal money
❌ Withdrawing funds without declaring salary or dividends
❌ Ignoring shareholder loan rules
❌ Accumulating passive investments without SBD planning
❌ Paying dividends without sufficient retained earnings
CRA closely reviews retained earnings usage during audits.
11. Retained Earnings vs Cash in the Bank (Important Distinction)
Retained earnings are an accounting concept, not cash.
A corporation can have:
High retained earnings but low cash
High cash but low retained earnings
Always assess:
Cash flow
Liquidity
Tax exposure
—not just the retained earnings balance.
Finally
Retained earnings are one of the most powerful tax-planning tools available to Canadian corporations—but only when used intentionally.
Handled correctly, they can:
Defer personal tax
Strengthen the business
Fund long-term investments
Support retirement and estate planning
Handled poorly, they can:
Trigger CRA reassessments
Cause unexpected personal tax
Reduce access to small business benefits
The most effective use of retained earnings rarely comes from relying on a single strategy in isolation. Instead, successful owner-managers often apply a combination of approaches—retaining profits for tax deferral, paying a mix of salary and dividends, timing bonuses correctly, investing excess funds thoughtfully, using holding companies for protection and flexibility, and incorporating insurance or retirement planning where appropriate. When coordinated properly, these strategies help smooth taxable income over time, preserve access to small business benefits, manage cash flow, and reduce overall tax exposure—both corporately and personally. However, it’s important to recognize that no one strategy fits every corporation. The right mix depends on the business’s income level, growth stage, personal cash needs of the owner, and long-term goals. Retained earnings are powerful—but only when managed as part of an integrated tax plan rather than a one-size-fits-all solution.