After the initial hustle it takes to grow a new business, the moment owners can pay themselves is a milestone worth celebrating.
That said, it arrives with a raft of new tax decisions — the kind you can’t answer by downloading a handy checklist from the internet. Designing a balanced tax strategy is a complex process that requires deep expertise.
BDO Canada has that expertise. They’ve been helping businesses navigate complex business decisions for more than 100 years.
If you are a controlling shareholder and manager of a Canadian-controlled private corporation (CCPC) and live in Canada — meaning both you and your company are subject to Canadian tax on the taxable income you receive — these tax tips are for you.
1. Salary, or dividends?
As an owner-manager, you have two ways to pay yourself. One, a salary or two, with dividends.
With a salary, your company will be entitled to a deduction that determines taxable income for that salary.
With dividends, you leave the funds in the company to be taxed as corporate profits and the directors can declare a dividend to you as a shareholder, which will be taxable to you.
2. Find balance through integration
Whether you choose a salary or dividends, the tax concept of integration ensures what you’ll pay in taxes for either strategy will be the same.
At least in theory. Integration isn’t perfect, and the degree to which tax is integrated varies due to varying tax rates across different provinces and territories.
3. Special tax status of CCPCs
Small business deduction affords CCPCs a special status.
The first $500,000 of net business profits earned are taxed less than general business profits thanks to the small business deduction. It lowers the tax rate from 15 per cent to 9 per cent for the first $500,000.
This status extends to the provincial and territorial level as well, which typically have lower tax rates for small businesses.
One benefit is the opportunity to reinvest that 6 per cent savings back into the company. A second is a lower rate tax when you pay yourself dividends out of the first $500,000, which will be taxed at the 9 per cent small business rate rather than the 15 per cent corporate rate.
4. Benefit of a tax deferral
Owners need to consider whether a tax deferral — where profits are retained in the company and paid out as dividends years later — is right for them.
The charts in the appendix show the deferral achieved when earning either small business income or general business income in a CCPC.
The time value of money and the rate of return on money re-invested in the business must be considered to properly measure the benefit of a tax deferral.
5. Considerations for salary vs. dividend
The decision to pay a salary or dividend from the company will be based on factors such as:
- whether you have any other sources of personal income, as this affects the tax rate on salary or dividends
- what funds you need from the company for your personal expenses
- whether you want to make contributions to an RRSP and the CPP
- whether you are paying child care expenses
- whether you are the lower-income spouse or common-law partner in your relationship
- whether you use your personal vehicle for business purposes and want to deduct expenses related to using such vehicle on your personal tax return
Your BDO advisor can help assess the best option depending on your personal circumstances.
6. Want to pay your personal expenses through the company?
It’s important to pay personal expenses outside of business and keep corporate expenses in the company.
But if company funds are used to pay personal expenses on occasion, here are a few things to know:
- if the loan is not repaid within a year of the end of your company’s taxation year, the amount of the loan will be considered taxable income to you as a shareholder
- if a dividend is declared, it can be used to repay this loan
- if your preference is to have earned a salary from the company, a portion of the salary can be used to repay this loan
- if the loan balance is not repaid before it is included in taxable income, a deduction from income can be claimed if the loan is subsequently repaid
The bottom line?
Even after a careful analysis of each issue, business owners should be reviewing their remuneration tax strategy yearly to make sure it’s up-to-date.
At this stage of the game, it’s time to make your money work for you.
Have questions about the best remuneration strategy for you?
Reach out to your local BDO office or one of the contacts below to find out what tax strategies are best for you.
Mathieu St-Denis, Tax Partner
Jeff Johnson, Market Leader