As the end of another year approaches, the wise business owner tops their priority list with remuneration and tax planning strategies. Specifically, whether the profits earned in the corporation throughout the tax year should be taken as a salary, bonus or left in the company to be distributed as a dividend.
Salaries and Bonuses.
Salaries and bonuses are deducted as corporate expenses, which help to reduce “corporate” taxable income. For individuals, salaries and bonuses qualify for allowable RRSP contributions. Paying a salary also allows you to pay into CPP (Canada Pension Plan), a very important factor when considering retirement. 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 would likely disallow an exaggerated salary if the sole purpose is income splitting.
When an owner decides to pay himself a salary, other factors should be taken into consideration. Paying a salary means source deductions need to be filed every month and T4 slips prepared at year end. Taxes are paid up front.
Dividends on the other hand are not deductible as a business expense. Dividends are paid out of after-tax profits at the end of the tax year. Dividends can be paid to any or all shareholders. It is definitely an easier way to pay yourself as an owner, but you also need to consider that you will not add any room to your RRSP allowable contribution, you will not be paying into CPP (for your retirement) and you may not be able to take advantage of all available tax credits and deductions.
How an owner chooses to compensate himself is solely dependent on their individual circumstances. Some business owners choose a mix of salary and dividends. Tax planning should always be a high priority and revisited each year and revised based on the needs of the business owner and the corporation.
All strategies, whether salary, bonus or dividends eventually 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 as possible. Talk to us about your needs for Custom Reporting and Financial Analysis today!