When your business cuts you a cheque, how should this get recorded in your business' books? What are the tax implications?
If you are a shareholder (ie. owner) of a corporation, the most common ways you can record money from your company include:
1. pay out of your shareholder loan account, if any;
2. receive a dividend from the corporation; or
3. paying yourself a salary.
Paying Out your Shareholder Loan
This means that you are withdrawing money that you, personally, have put into the business, either as cash or as expenses that you paid out of pocket on behalf of the business.
Tip: Be careful not to withdraw too much, because amounts taken out in excess of your loan to the business may result in flowing directly into your income.
Receiving a Dividend
Dividends are paid from the corporation from after-tax profits. In order to avoid double taxation, where the company is taxed on profits, then you are taxed when you receive the dividends, individuals received a "dividend tax credit" in order to neutralize this flow of funds.
Paying Yourself a Salary
Salary expenses are fully deductible to your corporation, meaning that they reduce your company's taxable income; however, the company would also be liable for paying Canada Pension Plan ("CPP") contributions on your behalf (as a holder of more than 40% of the voting shares, you would be exempt from Employment Insurance ("EI") premiums). This effectively increases the total "taxes" that are paid.
Tip: Amounts must actually be paid to the shareholder within 180 days to be deductible to the company, and payroll remittances must generally be made to the government within 15 days in the month after payment.
When OMNI conducts a salary-dividend analysis for your company, the method of drawing money out is based on the above factors, as well as others, which may include:
- how much taxable income the company does your company have?
- what your family income situation like?
- would you like to gain additional RRSP room, which is based on 18% of earned income?
- will you be relying heavily on CPP income when you retire?
Every situation is different and there is no one "right" way to withdraw funds from your business!
Get in Touch with OMNI to determine how to best optimize your personal and business goals and how to minimize your overall tax liabilities.