Yes, this CRA rule may apply to you: a Canadian corporation can retain profits within the company and reinvest them without immediately distributing them to shareholders as dividends or salaries. This allows you to defer personal taxes on that income in the current year, though the corporation itself pays corporate tax on those profits. The real tax advantage comes from the spread between the corporate tax rate and your personal marginal tax rate, plus the flexibility to time withdrawals strategically in lower-income years. When you operate as a sole proprietor, any profit you earn is automatically added to your personal income, and you pay tax at your personal marginal tax rate immediately. A corporation works differently. The corporation pays corporate tax on its profits, and whatever remains after corporate tax is called retained earnings. You can leave that money inside the corporation to grow your business, invest in equipment, or build a cash reserve without triggering additional personal tax. This creates a timing advantage. If your personal tax rate is higher than your combined federal and provincial corporate tax rate, you've effectively deferred paying the difference.
No, there's no CRA rule requiring a minimum holding period. However, the CRA expects retained earnings to have a genuine business purpose. If you retain profits and withdraw them immediately for no business reason, the CRA may view this as an avoidance scheme. Document your reinvestment plans to show a legitimate business purpose.
You only pay personal tax when you withdraw retained earnings or receive them as dividends. The corporation pays corporate tax first. However, if the CRA determines retained earnings were used for personal purposes (like a shareholder loan for a home purchase), you'll owe personal tax immediately even if you didn't physically withdraw the money.
Retained earnings are part of the corporation's assets and are typically included in the sale price when the business is sold. If the corporation is dissolved without selling, retained earnings must be distributed to shareholders as a final dividend, triggering personal tax on the full amount in that year.
No, you cannot directly transfer corporate retained earnings into your personal RRSP. However, you can withdraw the earnings as a dividend (paying personal tax on the distribution), and then contribute that after-tax cash to your RRSP in future years if you have contribution room. Use the [RRSP Refund Optimizer](/tools/rrsp-optimizer) to calculate the tax savings from RRSP contributions.
Possibly, if retention appears to be primarily a tax avoidance strategy with no legitimate business purpose. The CRA may apply GAAR if you consistently retain earnings, pay no reasonable salary or dividends, and have no evidence of business reinvestment or growth plans. Keep clear records of how retained earnings are used to avoid GAAR scrutiny.