Legally, the corporation is separate entity. Most incorporated small business in Canada is owned and operated by single person or members from same family as Husband & wife, Siblings etc.
Just like any other employee, business owner is also eligible for payment of Salaries. Salaries and other benefits are business expenses and helps the corporation to save taxes. If you are paying yourself a salary from your corporation, you must deduct CPP (salary more than $3500/year) and Tax deductions and must remit to CRA as scheduled. Owner is not eligible for Employment Insurance (EI) deductions. At the calendar year end, your corporation must report to CRA the salary withdrawn by owner and other employees by filing T4. You must report the salary withdrawn in your personal income tax filing.
The Owner must maintain perfect balance between cash flow requirements of the operations and equally important to get compensated to the efforts he puts in to run the corporation.
Given the complexity of situation, the CPA Accountant can help to derive the numbers for the owners considering all the factors associated to the corporation.
Dividends are also called as distribution of after-tax profits to the shareholders and thus considered to be investment income and are subject to corporate tax rate. It is not considered as business expense and so it will not help corporation to lower the tax.
When corporation pays dividends to the shareholders, it is reported in T5 with CRA. Dividends will withdraw the cash out of the corporation, and it has to be reported in shareholders personal income tax. Since dividends are paid on after-tax profits, it is reported in terms of Gross dividend and dividend tax credit is calculated in T5.
It is important to note here, for the owner - salary is earned income and dividend is investment or passive income thus only Salary determines the RRSP room and investments to reduce the personal tax impacts.
Given the advantages and disadvantages of dividend and salaries above, the choice of giving dividend or salary or hybrid depends on owner’s personal tax situation and business condition. Salary as earned income is more eligible for most benefits like RRSP rooms, contributions, and tax deductions it is also considered as important aspect for loan or mortgage applications.
The answer to the question “salary vs. dividends” is dependent on many factors. Review your own needs and choose according to what suits your current personal and business situation.
A shareholder loan is also known as a “withdrawal” or “Balance due from shareholder” transaction, this ledger can be positive or negative balance. The positive balance in Liability side of the Balance sheet shows amount payable to shareholder and negative balance shows amount recoverable from shareholders.
Under the Canadian Income Tax Act, a shareholder may take a loan from the corporation and vice versa. If the loan is taken by shareholder it is not required to report it as personal income on their personal tax return for that fiscal tax year, until, a shareholder defaults it and unpaid by the end of the next fiscal year. For the loan not to be considered income, according to the CRA, interest must be charged by the corporation at a prescribed rate to any shareholder loan amount. The shareholder loan like any other loan should be properly documented in a written agreement, and or documented as a corporate resolution that defines the terms of repayment to the corporation.
One of the benefits of a shareholder loan, as opposed to a salary or dividend, is the shareholders or owners ability to withdraw funds from the corporation without triggering a tax liability. This benefit creates planning opportunities but unfortunately it also creates more opportunities and incentives for shareholders to abuse the rules. As such, proper tax planning methodology must be in place to incentivise the shareholder loan to the benefit of the owner to avoid a costly or unintended tax consequence.
Unless you are not sure about which route you are taking, it is advisable to have CPA Accountant to take care of your books and all tax planning matters. Here we can help, as CPA team each member is highly qualified to perform complex tax structures to guide the client as required. Contact us at 647-800-3097 / email us info@orientaccounting.ca today ! and talk to our CPA for free consultation.