People often ask me, “what is the best way for my corporation to pay me?” It’s a great question! You do the work, and some of the money should end up in your pocket.
How can your company pay you?
- Draw on your shareholder account
- Pay yourself a salary
- Declare a dividend
Draw on Your Shareholder Account
The first way to have your small business corporation pay you is to simply draw money from your shareholder account. This just means that you cut yourself a cheque or transfer money online from your corporate account to your personal bank account.
It sounds pretty simple! And some of the time, it really is. But there’s usually more to it than that.
Drawing on your shareholder account is straightforward when your company owes YOU money. This can happen for a few reasons, like when you paid company bills with personal funds, or you rolled in some assets from your sole proprietorship, and the company issued you an IOU. If your company owes you money, you can go right ahead and pay yourself back with no further reporting needed.
But what if your company doesn’t owe you any money? Then cutting yourself a cheque becomes a little more complicated, especially when it comes to reporting. It’s like a line of credit. If you withdraw money, you now owe your company.
You might think, who cares? I’m good for it!
But the CRA cares. And there’s a good reason: drawing money from your corporation doesn’t formally get reported to the CRA as income. They don’t mind if you carry a balance for one cycle of year-end as long as you report a notional interest benefit on your personal tax return, but they will want to see that balance paid off before the next year-end cycle, or they will get cranky.
In this case, getting cranky means the CRA will impose a personal benefit, equal to the net monies drawn, effective from the date you first drew the monies, and because that is more than a year-end cycle, you will be looking at non-deductible arrears interest. When you eventually pay back that money, they will give you a tax deduction on your personal tax return, but this doesn’t erase the arrears interest.
If you do end up in this situation, you won’t have to pay back the company in cold, hard cash. You can designate it as either dividend or salary. You’ll have to pay the tax on it, but you won’t have to pay back the loan to your company. It sets you straight with the CRA, and it sets you straight with your own company. You’re formalizing the remuneration that you took as an advance against your shareholder loan.
Pay Yourself a Salary
The next way to draw money from your small business corporation is to pay yourself a salary. This is by far the easiest way to make sure you keep current with your taxes and stay paid-up with the CRA. There are also advantages for your company. A pay cheque is tax-deductible to your corporation. The net income of your corporation will be lower by the amount of your salary, and your business will pay less corporate tax.
However, you will be required to remit monthly statutory deductions off your pay cheque. Because you are the owner, you are not required to remit EI premiums. (There is a program where you can opt into EI premiums, but I’ll go into that in another blog). But you will have to remit CPP and federal taxes. This will keep you square with the CRA.
Paying yourself a salary is a good choice if you like to keep things simple for your tax bill. It’s also a good choice if you want to pay into the CPP plan, but as the company owner, there is a cost to the company for paying into the plan, which is dollar-for-dollar of CPP withheld from your pay cheque.
Your Salary as Earned Income
There can be another advantage to paying yourself a salary: your salary is earned income for tax purposes, and sometimes you WANT to report earned income. Earned income is the basis for determining the amount you can contribute to your RRSP, and you need earned income to deduct childcare expenses, claim moving expenses, and more. Work with your accountant to determine what is the best course of action for your life situation.
Declare a Dividend
The third way to withdraw money from your small corporation is to declare a dividend. Note that a dividend is NOT deducted from the profit of the company to determine the taxes and is NOT tax-deductible.
You will pay personal income tax on that dividend. Personal taxes on dividends are not quite as high as normal income, like salary or interest income, but don’t get too excited. Remember those kinds of income are deductible to the corporation, while dividends are not.
So, What Should I Do? Declare a Dividend or Pay a Salary?
Although there are provincial differences throughout Canada, there is virtually NO difference in the total taxes (factoring in the total sum of corporate and personal tax) between choosing a dividend or a salary as a remuneration strategy. Sometimes people are worried it will be a pain in the butt to declare a dividend every time they want to extract money from the corporation, but it’s not like that. You can go ahead and take out of your company throughout the year, keep track of your withdrawals, and make one declaration at the end of the year.
But a word of warning – and it can happen to all of us, including me – make sure you are keeping track of your withdrawals and stay mindful of the corporate and personal income tax you’ll have to pay at the end of the year. The CRA has an installment payment program, and you really should use this to avoid arrears interest, but lots of people don’t bother. But they can get over-extended, just like with a credit card.
Another interesting characteristic of dividend income is that it doesn’t attract CPP premiums. This means you can get out of the CPP program altogether if you want to, but the CPP is not a tax. It’s a pension plan. So your thinking should go like this: If I’m a small business owner, I’m paying double the CPP premiums as my buddy who works as an employee down at the plant. If I invest those premiums myself, I may be able to do better than the CPP…and I may not. But what you don’t do is go buy an ATV with all this new-found money! This strategy is for people who have the discipline and confidence to believe they can earn a better return than the CPP, and believe me, some people can!
But Wait, There’s More!
There is a really cool fourth way to withdraw money from your corporation that is way out of the scope of this blog. You can get the money out at half the tax rate. I’ll post a blog about it in the future, but in the meantime, if you want more information about this complex maneuvre, book a call with me, and I’ll take you through and see if it is something you qualify for. There is a condition; you need to have hundreds of thousands of dollars in your corporation and you really should have a personal need for the money to go this route.
If you’ve read this blog right to the end, you are one hell of a serious small business owner! If you’re not already a client, then you really should be, because Swain clients are very serious small business owners. Book a chat! And until next time, stay wealthy!
|Withdraw Money||It’s simple and straightforward.||Unless your company owes you money, you will have to pay this back or possibly face arrears interest.|
|Pay a Salary|
You pay tax as you go, and it keeps your books up to date.
Your salary is tax-deductible for your company which will then pay less corporate tax.
Your salary is earned income.
|You have to remit CPP and federal taxes.|
|Declare a Dividend|
You pay less personal tax on dividends.
You do not have to pay CPP, so you can choose to invest that money in other ways.
You do not have to remit CPP and federal taxes, but the dividend is not tax-deductible for your company.
You will have to set money aside to pay your personal and corporate tax.