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How to Pay Yourself from a Corporation in Canada?
08 Apr, 2024How to Pay Yourself from a Corporation in Canada?
If you’ve been looking for an answer to this question, it is safe to assume that you are involved in the day-to-day operations of your company, and are not just a passive investor. As a newly incorporated small business owner, if you want to have an educated conversation with a Chartered professional accountant regarding whether you should draw dividends or salary from the business, it becomes necessary to understand the nuances. For example, how does the cash flow in your corporation? Also, what are the pros and cons of both dividends and salaries? Should you consider getting a combination of both? Which one can give me the best tax benefit in Canada? Make an informed decision and utilize the accounting services to their full potential. Check out the blog below to decide whether you should pay yourself from a corporation, and how you should do it!Why do we pay ourselves salaries/ dividends from a corporation?
We pay ourselves from the corporations for a variety of reasons, starting with regulating the cash flow of the business to taking tax advantage. Here’s an explanation:- Cash Flow Management
- Tax Advantages
- Seasonal Income and Business Growth
- Regulating Money & Avoiding "Double Taxation"
Paying Yourself A Salary From Your Business in Canada
It is one of the most common ways of paying yourself from a corporation, because “Salary” is understood by both the commoners and bank/ financial institutions. Here’s how it works: Your corporation earns profits, out of which it pays salaries. This salary counts as an expense against the business. There is no business tax on the income paid as a salary. However, you’ll be liable to pay personal income tax, which will be applied to you as per the income tax bracket applicable. However, at the same time, you also have to pay the employer’s contribution to CPP (Canada Pension Plan) from the corporation’s profits. From the salary, you’ll be paying the employee’s contribution to CPP.Paying Yourself a Salary: Pros & Cons Comparison
Advantages | Limitations |
---|---|
Clear and Understood Income: Salary is a common income source and is easily understood by financial institutions for loans or mortgages. RRSP Contribution Room: Salary payments contribute to your Registered Retirement Savings Plan (RRSP) contribution room, allowing you to save for retirement. Tax Deductible Expense: Salaries are a tax-deductible business expense, reducing your corporation's taxable income. | Payroll Requirements: Setting up payroll involves administrative tasks and deductions for CPP (Canada Pension Plan) from both the employer (corporation) and employee (you). Potential Higher Personal Income Tax: Salary income may be taxed at a higher personal income tax rate compared to dividends in some cases. |
Paying Yourself Dividends From Your Business in Canada
Dividends are another option for drawing income from your Canadian corporation. They do not attract any payroll deductions and are paid out of a corporation's after-tax profits. Here’s how it works: Paying yourself dividends from your Canadian corporation is a way to distribute the company's profits. Unlike a salary, dividends come from the money remaining after the corporation has paid its taxes. This means the profits you receive as dividends have already been taxed once at the corporate level. As a shareholder, you declare a dividend amount based on the corporation's available profits. The corporation then transfers those funds directly to your personal account. There are no payroll deductions or CPP contributions required for dividends, saving the corporation administrative hassle. It's important to note that dividends are typically taxed less favorably on your personal tax return than salary income. However, the combined corporate and personal tax burden on dividends might be lower depending on your situation. If you operate your business from BC, you can consult a Chartered professional accountant BC that offers free consultation.Paying Yourself Dividends: Pros & Cons Comparison
Advantages | Limitations |
Simpler Payout Process: Dividends avoid payroll deductions and paperwork, reducing administrative burden for the corporation. Potential Tax Savings: Depending upon the tax bracket your income falls in, a combination of corporate and personal tax on dividends may be lower than salary income. Flexibility: A business can adjust dividend payouts depending on the profits of the company. Thus, there is more flexibility than a fixed salary. | No RRSP Contribution Room: Dividends do not contribute to RRSP. Thus, it limits your retirement savings options. Potential Tax Disadvantage: On your personal tax return, dividends are less favorably taxed than salaries. CRA Scrutiny: CRA may scrutinize your books if you are paying unreasonable dividend payments as it can be seen as a way of avoiding personal income tax. |