--- title: "Retained Earnings: What They Are and What to Do | EverStone" url: https://www.everstonecpa.com/blog/retained-earnings-canada description: "What retained earnings are, the leave-in-or-pay-out decision, when a holdco protects them, and how investing them erodes the small business rate." updated: 2026-10-04 publisher: EverStone CPA Inc. (Chartered Professional Accountant firm, Abbotsford, BC) service_area: British Columbia, Ontario and Manitoba --- [Home](https://www.everstonecpa.com/) [Blog](https://www.everstonecpa.com/blog) Retained Earnings: What They Are and What to Do With Them Structure # Retained earnings: *what they are, and what they quietly decide* By EverStone CPA · August 2026 · 3 min read **Quick answer:** Retained earnings are accumulated after-tax corporate profits not yet distributed to shareholders. They are an accounting total, not a bank balance, and as they grow they force three real decisions: whether to [leave profit in or pay it out](https://www.everstonecpa.com/blog/leave-money-in-corporation-or-pay-out-canada), whether the balance now needs [creditor protection](https://www.everstonecpa.com/blog/holding-company-canada-when-it-makes-sense), and whether investing it will erode access to the small business rate. Where an asset is sold for less than its remaining balance, that is [a terminal loss](https://www.everstonecpa.com/blog/terminal-loss-canada). What this covers, at a glance. ## What retained earnings are, and are not Every year a corporation keeps some of its after-tax profit rather than paying it all out, and the running total of those kept profits is its retained earnings. The figure lives on the balance sheet as accumulated history, not as money in an account: retained earnings may be sitting in the bank, but they may equally be tied up in equipment, receivables or investments. A healthy retained earnings figure and a thin bank balance can describe the same corporation. ## The decision they force every year: leave it in, or pay it out Retained earnings exist because leaving profit in the corporation defers personal tax — the money has borne corporate tax, and the personal layer applies only when it comes out as salary or dividends. Whether to keep deferring is an annual decision, not a permanent setting: it moves with what you need personally, whether you want RRSP room and CPP entitlement, and what the money would do inside the company. The full trade-off is worked through in [leave it in or pay it out](https://www.everstonecpa.com/blog/leave-money-in-corporation-or-pay-out-canada), and the [salary vs dividends calculator](https://www.everstonecpa.com/salary-vs-dividends-calculator) puts numbers on the withdrawal side. **Incorporated, or about to be?** We prepare the T2 and year-end statements at a fixed fee quoted in writing before any work starts, and plan how you pay yourself. See [our corporate tax work](https://www.everstonecpa.com/tax-services), or [get a year-end quote](https://www.everstonecpa.com/book-online). ## When the balance needs protecting: the holding company question “Should I set up a holding company?” tends to arrive once a corporation starts accumulating real retained earnings. Moving them up to a holdco can protect them from the operating company’s business creditors and lawsuits, and for a newer or smaller corporation, the extra cost and complexity of running two companies usually isn’t worth it yet. What tips the answer is the size of the balance and the risk the operating business actually carries: [when a holdco makes sense](https://www.everstonecpa.com/blog/holding-company-canada-when-it-makes-sense) works through both. ## How retained investments can erode the small business rate Retained earnings that get invested start earning passive income, and passive investment income above a threshold reduces the [small business deduction](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012.html) available on the active income earned alongside it. Nothing in the bank balance signals this — corporations that accumulate faster than they spend are exactly where the erosion starts, which is why the investing decision deserves modelling before the money moves. The mechanics are in [investment income in a corporation](https://www.everstonecpa.com/blog/investment-income-in-a-corporation-canada). None of these decisions is one-time. Retained earnings grow every profitable year, and the right structure at $50,000 of accumulated profit is rarely the right one several years later, which is why the balance is worth an annual look with [an advisor](https://www.everstonecpa.com/advisory-services) rather than a glance at filing time. [Email or book](https://www.everstonecpa.com/book-online)[Ask a question](https://www.everstonecpa.com/quick-question) General information, not tax advice. Every corporation’s situation differs — confirm anything that affects a decision by [sending us an enquiry](https://www.everstonecpa.com/book-online). ## Common questions **Are retained earnings the same as cash in the bank?** Retained earnings are an accounting total of accumulated after-tax profit, not a cash account. The balance may be represented by cash, but equally by equipment, receivables or investments, a corporation can show healthy retained earnings and a thin bank balance at the same time. [Ask about your case →](https://www.everstonecpa.com/quick-question) **Do retained earnings get taxed again when I take them out?** Retained earnings have already borne corporate tax; the personal layer applies when they are paid out as salary or dividends. Leaving them in defers that personal tax. It does not eliminate it. The timing and form of withdrawal is the decision that matters. **When do retained earnings justify a holding company?** A holding company starts to make sense once the operating company has built up meaningful retained earnings and carries real business risk — the holdco can hold the accumulated profits out of creditors’ reach. For newer or smaller corporations the added cost and complexity usually is not worth it yet. ## Related reading [Leave money in, or pay it out? The deferral decision retained earnings force every year.](https://www.everstonecpa.com/blog/leave-money-in-corporation-or-pay-out-canada) [Holding companies: when they make sense Creditor-proofing and when a holdco is not worth the cost.](https://www.everstonecpa.com/blog/holding-company-canada-when-it-makes-sense) [Investment income in a corporation RDTOH, the passive income rules and the small business limit.](https://www.everstonecpa.com/blog/investment-income-in-a-corporation-canada) [The record of employment](https://www.everstonecpa.com/blog/roe-record-of-employment-canada) ## Talk to a CPA about this One Chartered Professional Accountant, start to finish. Fixed fees, quoted in writing before any work begins, and no obligation from a first conversation. [Get My Fixed Quote](https://www.everstonecpa.com/book-online) [Just a question? Ask it free](https://www.everstonecpa.com/quick-question) Email info@everstonecpa.com ★★★★★ “Personal. Professional. Responsive. Plus he saved me a bundle!” Corrin Skalbeck · Google Local Guide --- Source: https://www.everstonecpa.com/blog/retained-earnings-canada Contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online