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IBF Entrepreneur Online –
May 11th, 2021
Business owners make a multitude of decisions that may have significant implications on their taxes, especially when it comes to compensation from their incorporated business. One of these decisions is how to pay yourself as a business owner; you can choose to pay yourself a salary, in dividends, or a combination of the two. There are many things to consider when deciding the optimal mix other than just taxes. This blog will attempt to cover some of these considerations to help you make the right decision for you and your business.
Paying Yourself a Salary
If one decides to use this avenue, these salary payments become an expense to the corporation, which lowers your corporate taxable income leading to fewer taxes payable. In return, it becomes employment income to the business owner personally. Below are some additional points to consider when paying a salary:
On the other hand, if paying a dividend, the payments are not a corporation deduction and paid after-tax retained earnings. Dividends are classified as eligible or non-eligible, which is dependent on corporate income pools from which they are paid. Some points to consider if choosing this route as below:
Is One Option Better Than the Other?
The theory of integration implemented by the legislation indicates that there should be little difference in the overall income tax paid (personal plus corporate tax) either by paying a dividend or salary payments of the same amount. An owner should, in theory, find no advantage with one option over the other.
What Should You Do?
Due to the current tax systems in place, the results of calculations show minimal tax savings from one form of compensation to another. The decision can be dependent on many factors and circumstances as well as the corporation’s financial status. In most cases, taking a combination mix of the dividends and salary results in tax advantage of lower effective personal tax rates while also benefiting from CPP and RRSP contributions. It is advisable to consult a tax professional and account for various factors such as household income requirements, other spouse/common-law partners’ personal income, and other tax and non-tax factors prior to deciding on whether to pay a salary, dividends, or a combination of the two.
Laws, rules, policies, and regulations change from time to time and the application and impact of laws can vary widely based on specific facts involved. The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances, and exceptions in a newsletter such as this, a further review should be done by a qualified professional advisor. No individual or organization involved in either the preparation or distribution of this newsletter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
About the author: Vartika Satija
Vartika Satija, CPA, CA is an independent designated chartered professional accountant, striving to work with businesses to educate and provide a financial check-up of their business. Her passion is to partner up with sole proprietors, small businesses, and not-for-profits to provide ongoing guidance towards their unique accounting and tax requirements. Her mission is to ensure that small businesses are well educated and informed about the best tax and accounting practices to be able to manage their cash flows and utilize finances in the best possible ways to grow their business, achieve their financial goals, and make a difference in the community. Her intensive experience includes personal and corporate tax compliance, tax planning, and other business advisory roles. She’s been involved with all sorts of businesses including manufacturing, consulting, professional services, constructions, retail, restaurants, real estate, and many more. Connect with Vartika by visiting her website or on LinkedIn.
Source: Business Link
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