Retained earnings are the total profits your corporation has earned since it started, minus all the dividends it has paid out. The formula is: Beginning retained earnings + net income (or − net loss) − dividends = ending retained earnings. Retained earnings aren’t taxed again on their own. The corporation already paid tax on the profit. Shareholders pay personal tax only when the money comes out as dividends. And retained earnings are not the same as cash in the bank.
On this page
- What Are Retained Earnings? (Definition and Formula)
- How to Calculate Retained Earnings: Step-by-Step Example
- The Retained Earnings Statement and Where It Appears
- Are Retained Earnings Taxed in Canada?
- What Owners Can Do With Retained Earnings
- Retained Earnings vs Cash: Why They’re Not the Same
- Negative Retained Earnings (Deficit): What It Means
- FAQ: Retained Earnings
- Plan Your Corporation’s Year-End With Maxpro
What Are Retained Earnings? (Definition and Formula)
Every year your corporation makes a profit or a loss. Whatever profit it doesn’t pay out to shareholders stays in the company, and that running total is retained earnings. It’s part of shareholders’ equity on the balance sheet. Ending retained earnings = Beginning retained earnings + Net income − Dividends If the company loses money, net income is negative and retained earnings go down. If retained earnings drop below zero, it’s called a deficit.
How to Calculate Retained Earnings: Step-by-Step Example
Maple Renovations Ltd., December 31 year-end:
| Step | Item | 2025 | 2026 |
| 1 | Beginning retained earnings | $40,000 | $95,000 |
| 2 | + Net income after tax | $85,000 | $120,000 |
| 3 | − Dividends declared | $30,000 | $50,000 |
| 4 | = Ending retained earnings | $95,000 | $165,000 |
Where each number comes from:
- Beginning: last year’s ending retained earnings (from last year’s balance sheet)
- Net income: the bottom line of this year’s income statement, after corporate income tax
- Dividends: dividends declared during the year (not salary, since salary is already an expense in net income)
The Retained Earnings Statement and Where It Appears
- Statement of retained earnings
A short statement in your year-end financial statements showing exactly the calculation above.
- Balance sheet
Under shareholders’ equity:
| Shareholders’ equity | |
| Share capital | $100 |
| Retained earnings | $165,000 |
| Total equity | $165,100 |
- Your T2 (GIFI)
- Code 3600 on Schedule 100: retained earnings / deficit on the balance sheet
- Codes 3660 to 3849: the continuity, meaning start, net income, dividends and end
See: T2 Schedules 100 and 125 explained
Are Retained Earnings Taxed in Canada?
Not directly. Here’s how the tax works:
| Stage | Tax |
| Corporation earns profit | Corporate tax, about 11% on the first $500K of active business income (BC/AB) |
| Profit stays in the company as retained earnings | No additional tax |
| Retained earnings are paid out as dividends | Shareholders pay personal tax on the dividends (with a dividend tax credit) |
| Retained earnings are invested in the company (stocks, GICs, rental property) | The investment income is taxed at a high corporate rate (about 50%), part of it refundable when dividends are paid |
Watch out: If the company earns more than $50,000 of passive investment income in a year, your small business deduction starts to shrink the following year. Large retained earnings invested passively can push your active business income into the higher general rate. See RDTOH and passive investment income.
What Owners Can Do With Retained Earnings
| Option | What it means | Tax |
| Leave it to grow the business | Equipment, hiring, expansion, cash cushion | No extra tax now |
| Pay dividends | Cash to shareholders | Personal tax on dividends. See eligible vs non-eligible dividends |
| Pay down debt | Reduce loans | No extra tax |
| Invest inside the company | GICs, stocks, real estate | Investment income taxed in the corporation, and watch the $50K passive limit |
| Move it to a holding company | Protect it from operating company creditors | Inter-corporate dividends are usually tax-free, if planned properly. See holding company in Canada |
| Pay tax-free capital dividends | Only from the capital dividend account, not regular retained earnings | Tax-free. See capital dividend account |
Can I just take it as salary? Salary is a deductible expense in the year it’s paid, so it reduces that year’s profit. It doesn’t come out of existing retained earnings directly. See salary vs dividends.
Retained Earnings vs Cash: Why They’re Not the Same
This is the most common misunderstanding we see. Retained earnings is an accounting total of past profit. Cash is what’s actually in the bank. They’re different because profit may have been:
- Spent on equipment, vehicles or inventory
- Tied up in unpaid customer invoices (accounts receivable)
- Used to repay loans
- Lent to shareholders (shareholder loan)
Example: Maple Renovations has $165,000 of retained earnings, but only $22,000 in the bank, because it bought a $90,000 truck and customers owe it $53,000. So “we have $165,000 of retained earnings” does not mean you can pay a $165,000 dividend tomorrow. You need the cash, and the company must remain solvent after paying it.
Negative Retained Earnings (Deficit): What It Means
A deficit means the company’s total losses since it started are bigger than its total profits (after dividends). Common causes:
- Start-up losses in the first years
- One bad year that wiped out earlier profits
- Paying dividends larger than the profit actually earned
Why it matters:
- Under corporate law, you generally can’t pay dividends if it would leave the company unable to pay its debts
- Banks and lenders look closely at deficits
- Tax losses may still be useful. Non-capital losses can be carried back 3 years or forward 20 years to reduce taxable income
FAQ: Retained Earnings
Is retained earnings an asset?
No. It’s part of shareholders’ equity. The assets it relates to (cash, equipment, receivables) are listed separately.
Do retained earnings include salary paid to the owner?
No. Salary is an expense that reduces net income before it reaches retained earnings.
Can retained earnings be negative?
Yes. It’s called a deficit.
Do sole proprietors have retained earnings?
No. Retained earnings exist only in corporations. A sole proprietor’s equity is owner’s capital and drawings.
Should I leave money in my corporation or take it out?
It depends on your personal tax bracket, cash needs, and how much passive income the company already earns. If you don’t need it personally, leaving it in usually defers tax.
How do retained earnings affect selling my business?
Large retained earnings invested in non-business assets can disqualify your shares from the lifetime capital gains exemption. You may need to “purify” the company before a sale. See LCGE in Canada.
