Help With Tax Planning Strategies…
As we close out another calendar year, smart business owners are thinking about compensation and tax planning strategies.
If your business/corporation has generated a profit, you have some decisions to make. The disbursement or distribution of profits could be:
- Taken as a salary or bonus – by you
- Left in the company to fund new projects or improvements
- Distributed as a dividend to shareholders or stakeholders
This is when Custom Reporting & Financial Analysis by the professionals at The Art of Accounting can help!
How Salaries and Bonuses Benefit a Corporation
Salaries and bonuses are considered corporate expenses and therefore reduce your overall corporate taxable income.
How Salaries and Bonuses Benefit an Individual
- Paying yourself a salary, or an increase in salary, allows you to pay into CPP (Canada Pension Plan), a very important factor when considering your retirement. Note: When a business owner pays him/herself a salary, source deductions need to be taken and remitted to CRA every month. In addition, T4 documents must be prepared at the end of the calendar year. Learn more about our Bookkeeping, Payroll & GST/HST Services.
- Salaries and bonuses qualify for eligible RRSP contributions. This remuneration method also allows income splitting, paying a salary to a family member*, as well as yourself. *Be sure the family member is actually working in the corporation and is paid according to their role and responsibilities. CRA may disallow an exaggerated salary if the sole purpose is income splitting.
Can Dividends Be Treated as a Business Expense?
No. Dividends are paid out of after-tax (bottom line) profits at the end of the tax year. While it’s certainly easier to pay yourself a dividend as the owner, it’s important to recognize the following aspects:
- Your RRSP allowable contribution amount will not increase
- You will not be contributing to CPP (for your retirement)
- You may/may not be able to take advantage of all available tax credits and deductions
How to Choose the Correct Compensation Method
Choosing the “correct” method is dependent on both (a) the corporation’s financial position and (b) the business owner’s personal financial circumstances. Some business owners choose a mix of salary and dividends. Tax planning and remuneration options should be analysed each year and revised based on the needs of the business owner and the corporation.
All strategies, whether salary, bonus, dividends or a combination of the three, will always result in the paying of taxes. There is no way around it.
Let the experts at The Art of Accounting help you pay as little tax as possible. Talk to us about your needs for Custom Reporting and Financial Analysis and Bookkeeping, Payroll & GST/HST Services today! We’re conveniently located and Burlington, Ontario and ready to help you create an edge for your business.