Put your retained earnings to work

Tax Managed Strategy 11

If you’re a business owner looking to pull money out of your company, there’s a strategy available to you. Many business owners have built up significant retained earnings in their corporation and are looking for ways to pull those earnings out.

Retained earnings are a mixed blessing for business owners. On one hand, they represent the company’s success and profitability. On the other hand, it can be a challenge to take those earnings out of the business without incurring a large tax bill.

There’s a simple strategy available that moves earnings out of the company and puts them to work generating investment returns in a tax-efficient way. The strategy involves taking out an investment loan and using withdrawals from your corporation to pay the interest on the loan. The interest payments are generally tax-deductible¹ and allow you to withdraw an equivalent amount from your company without any net tax consequence.² At the same time, you now have the potential to significantly increase the value of your non-registered investment portfolio over the long term as you have a large lump-sum amount invested that takes advantage of the benefits of compounding.

Furthermore, investing in a segregated fund contract can provide business owners with the potential to safeguard their portfolio from creditors, helping protect their capital and potentially avoiding estate fees while diversifying their investments.

Consider the tax consequences of having the corporation fund a $250,000 personal investment

Traditional method of taking money from a business

Pre-tax withdrawal from retained earnings


Subtract taxes paid @ 50%


Net asset available for investment


Tax Paid


For illustration purposes only.

Looking at a leverage strategy

Net asset available for investments


Annual withdrawal from retained earnings to service interest-only loan 


Interest deduction


Tax Paid


For illustration purposes only.

Here's how it works, step-by-step

Step 1

Take out an investment loan.

Step 2

The amount of the loan is applied in a lump sum to purchase non-registered assets.

Step 3

The corporation pays you an amount as salary or bonus equal to the interest on the leveraged loan. This amount is included in income.

Step 4

You may be able to deduct the interest payments at your marginal tax rate. 

The result is that you use an investment loan to invest in a non-registered investment. Meanwhile, you use the payments from your company to fund the interest payments. The interest payments may be tax-deductible and offset the amount brought into income, allowing you to take money out of the corporation without paying any additional tax.

As you can see, it’s a simple strategy – and it can help make a big difference to your bottom line.

How far ahead could you be? – A case study

Jeremy, age 45, is a business owner. He takes out a $250,000 investment loan and invests the loan proceeds in a segregated fund contract.


Total loan amount

$250,000 Annual investment fund rate of return


Loan interest rate

4% Annual taxable portion of fund return 25%

Marginal tax rate

50% Tax rate on income allocations 25%

What it looks like at year 10

After 10 years, assuming an average annual compound return of 5 per cent, the leveraged account has grown in value to $407,224. After repayment of the loan, after-tax net worth has increased by $127,744.

Using this leverage strategy, personal net worth can be enhanced without paying tax on the withdrawal of retained earnings from the company.

Sample case for illustration purposes only. This illustration assumes that a specific percentage of loan interest is tax deductible. Individual tax situations and tax deductibility will vary. The $127,744 represents a gain of $157,224 less $29,479 taxes paid on the leveraged investment. Assumptions used are for illustration purposes only and aren’t indicative of future performance.

Ideal candidates

  • Business owners who’ve built up significant retained earnings within their corporation that they would like to withdraw in a tax-efficient manner and use to increase the value of their personal assets

Take action


  • the amount of retained earnings you would like to pull out of the corporation
  • using payments from the company to fund tax-deductible interest expenses on an investment loan.

Investment options with Manulife Investment Management

Mutual funds can help meet your specific financial needs throughout your life. Whether you’re just starting out, accumulating wealth, or nearing/in retirement, mutual funds offered by Manulife Investment Management can provide you with solutions to help build a portfolio that meets your needs. Manulife is committed to providing quality investment products and services so you can enjoy life and worry less.

Segregated fund contracts combine the growth potential offered by a broad range of investment funds with the unique wealth protection features of an insurance contract. Through Manulife segregated fund contracts, investors can help minimize their exposure to risk through income, death, and maturity guarantees; potential creditor protection features; and estate planning benefits — all from a single product or insurance contract.

Manulife Bank investment loans allow investors to make a large initial investment contribution and benefit from the potential for compound growth and interest deductibility. These loans are available for a variety of Manulife mutual fund accounts and segregated fund contracts, and offer attractive options such as 100 per cent financing, no margin-calls on market fluctuations,³ interest-only payments, and a one-step application process.

1 Actual tax deductibility of loan interest depends on a number of factors, with the Income Tax Act (Canada) providing the framework for determining deductibility. Individual tax situations and tax deductibility will vary. Results for Quebec residents may differ due to different deductibility rules. Clients should consult their own tax and legal advisors with respect to individual circumstances. 2 The funds withdrawn must be paid to the business owner as salary or bonus, not directly to the lending institution. The corporation shouldn’t guarantee the loan or provide security for the loan as this may have adverse tax consequences. Retained earnings can be paid out as dividends, which have different tax implications that will affect the tax consequences and results of this strategy. Withholding tax on a withdrawal from the company can be reduced by filing form T1213, “Request to Reduce Tax Deductions at Source.” 3 Manulife Bank will not trigger margin calls for investment loans where the security pledged has a guaranteed value.  For all other loans where the facility is $1,000,000 or less and the loan-to-value (LTV) exceeds 125%, Manulife Bank reserves the right to convert it to a principal + interest loan amortized over a period of up to 20 years.  If, after the 3rd consecutive principal and interest payment, the LTV has been reduced to no more than 100%, Manulife Bank may allow the facility to return to the original payment option.  When the loan is greater than $1,000,000, a margin call is triggered at 85% LTV and must be returned to 75% immediately.   Failure to satisfy the Bank’s margin request time lines will result in the loan being called, investments being redeemed, and any shortfall is the borrower’s responsibility.

Borrowing to invest may be appropriate only for investors with a higher risk tolerance. You should be fully aware of the risks and benefits associated with investment loans since losses as well as gains may be magnified. Preferred candidates are those willing to invest for the long term and not averse to increased risk. The value of your investment will vary and is not guaranteed; however, you must meet the loan and income tax obligations and repay the loan in full. Please ensure you read the terms of the loan agreement and the investment details for important information. Manulife Bank of Canada solely acts in the capacity of lender and loan administrator and does not provide investment advice of any nature to individuals or advisors. The dealer and advisor are responsible for determining the appropriateness of investments for their clients and informing them of the risks associated with borrowing to invest.

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Manulife Funds and Manulife Corporate Classes are managed by Manulife Investment Management Limited (formerly named Manulife Asset Management Limited). Manulife Investment Management is a trade name of Manulife Investment Management Limited. The dealer and advisor are responsible for determining the appropriateness of investments for their clients and informing them of the risks associated with borrowing to invest. The Manufacturers Life Insurance Company (Manulife) is the issuer of insurance contracts containing Manulife segregated funds and the guarantor of any guarantee provisions therein. Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. Quick loans, Multiplier and Custom loans are offered by Manulife Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

MK1700E 05/21

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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