Business Owners – How You Should Pay Yourself

Business Owners – How You Should Pay Yourself

Determining the best way to pay yourself through your corporation can be a daunting task but it doesn’t have to be. There are many options to choose from and before making the decision, you’ll want to consider both your personal financial circumstances and the corporation’s.

Many times, salary and bonuses are paid out to individuals to help ensure the corporation doesn’t earn over the Small Business Limit of $500,000 because a privately controlled Canadian Corporation (CCPC) pays lower income taxes if the income amount remains below $500,000. After salary and/or bonuses are paid, dividends can be used if more income is necessary.

Before determining the correct approach for paying yourself through your corporation, you’ll want to consider a few personal financial circumstances including:

* What is your income level?
* What are your cash flow needs?
* What is the corporation’s predicted income for the year?
* Is having RRSP room or other personal income tax deductions important?
* How old are you?

Because there are so many issues and points to consider in order to ensure the best possible outcome, we highly recommend consulting with a financial professional like an accountant, tax lawyer or financial advisor like myself.

SALARY OR DIVIDENDS: PROS AND CONS

Salary Pros
* If the corporation pays a salary, the biggest advantage is that you have a personal income
* You will be able to contribute to an RRSP
* You will be paying into the Canada Pension Plan (CPP)
* The salary or bonus paid will be an expense for the corporation

Salary Cons
* Salary is one hundred percent taxable (unlike dividends, which are taxed at a lower rate)
* You will have to set up a Payroll account with the CRA and do all related paperwork such as preparing T4 slips
* If profits vary from year to year, paying a salary can cause tax problems because you won’t be able to carry back a business loss in future years

Dividend Pros
* Dividends are taxed at a lower rate than salary, which can result in less overall tax
* Having no CPP contributions can save you money.
* Simple process: write a cheque to yourself from the corporation. At the end of the year, update the corporation’s minute book and prepare a director’s resolution for the dividends paid

Dividend Cons
* You might want to pay CPP because not paying will lessen your CPP allotment upon retirement
* Cannot contribute to an RRSP because you don’t have any employment income
* Receiving dividends instead of salary can reduce other possible personal income tax deductions for you, such as child care expense deductions

Bottom Line

Having a corporation can lend many benefits including freedom to choose the best way to get paid. With many options and combinations to choose from, it is important to take a good look at your personal finances and goals as well as the corporation’s to ensure the best approach is implemented. If you find yourself unsure or would like to discuss anything further, I encourage you to get in touch with me to set up a time to meet.