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[...] 27th, 2008 at 12:39 pm by Cecilia Leung · No Comments I have posted an article about How to Pay Yourself about a year ago during peak business fiscal year end, and this year I have been having getting [...]

Hi Cecilia,

Thanks for the information! I would also be very grateful if you could please answer these two questions:

1. Am I allowed to invoice my own corporation as a separate, sole proprietor (i.e. a sub-contractor), or are my only options of reimbursement the three that you mentioned here?

2. If I am not allowed to invoice my own corporation, could you please point me to the corporate tax law which states this?

Thanks
Vlad

Hi Vlad,

You can certainly pay yourself as you are a self-employed person. The catch of this method is that you will need to register yourself a business number for your self-employee business. So now you have two business, one corporate, and one sole proprietor with two business number, and if you want to collect and claim GST, PST, or import and export, you will also need to register separate accounts for each business. When you file your personal tax, the amount invoiced to your self-employee business and your business expenses can be reported in form T2124 Statement of Business Activities or T2032 Statement of Professional Activities. (You can find this forms in the CRA website).

Hope this help.
Cecilia

Hi Cecilia,

That’s perfect, thanks! (And I really appreciate your quick response too!)

Regards
Vlad

Hi Cecilia,

Thanks for your articles!

I have some questions.

1. Let say my corporation’s income for some year is 100.000 and I drawn for myself during that year only 20.000$ to pay my bills and so on. Is it required (in principle) to pay the rest ($80.000) as dividends to shareholders. If not, what is the best way to use that money? Is it legal, for example, to buy some property (a car or a house) as corporation and to use them for one’s personal needs thereafter?

2. Let say I am the only shareholder and director of my corporation. Should there be at least one _paid_ employee (say director) or even the director need not have salary at all?

Thank you in advance.

You don’t need to pay yourself the rest of the $80k to yourself, afterall you need some money to run a business, it needs money to operate, to invest in other things, to expand, hire more people and such. The bottom line is that for any personal use dollars, you need to pay personal tax. Your company can pay for your car or house, those are consider taxable benefits to you. It is legal only if your company remit the taxes of the portion you use the house / car for your personal enjoyment.

To answer your second question, one person company is very common. No, the company does not need to have any employee. In fact a lot of start-ups have a few directors but no employee because no one is drawing income. These directors / shareholders are founders and investors of the company, and they are all volunteers to take the business off the ground.

Hope I answered your questions.

Thanks a lot, Cecilia!

In fact, I have some websites that bring an income which becomes significant, that is why I’m starting thinking about corporations.

I would like to have answers to some other, more specific, questions but I understand that the format of blog is not the best way to ask them.

Can I have some occasional consultations by email. If yes, how much would it cost?

No problem Andrey. I use http://www.HandyWise.com/resume2.aspx?userid=15 to conduct consultation business online. Currently I charge $20 per email thru HandyWise. If you prefer, you can sent us an email at info@wizebiz.ca, or directly to myself cecilia.leung@wizebiz.ca and see how we can help.

Hi Cecilia,
I’m trying to decide when to choose salary or dividend to pay myself and which method saves more on taxes (corporate+personal). I have this situation this year:
Corp Account Balance as of Jan 1 = $30,000
corporate income this year = $0
Personal money taken out this year= $20,000.

As I understand, this $20,000 I took out has already been taxed corporately in 2007. If I take this money as salary, then I have to do payroll deductions on it, which means pay taxes again on it , but if I take it as dividend, then I don’t have to pay anything?
What’s the implication on corp tax and personal tax for this year if I choose salary or dividend.
Hope I’m clear

Hi Zack,
If you have no income this year but took out $20,000 from your after tax money, both options will work fine depends on your situation. If your pay yourself $20,000 as salary, yes you will need to pay personal tax in the lowest tax bracket, you also claim a loss in your business earning this year. This loss can carry over to next year or a few years after in the future. If you are expecting a growth in your business, then paying yourself salary maybe your choice. Also remember if your household income is low, you can also claim GST back. One thing about paying yourself salary, is that you cannot claim a loss.

If you are not planning to have any business activities in the future, then paying yourself dividend maybe more appropriate. If $20,000 is all you earn over the year, after applying all the personal tax credits and the dividend tax credit, you shouldn’t need to pay any tax according to 2007 tax rate, if you do it will be a very small amount. Note that this method maybe a good method, but you may also find some of your tax benefits are wasted. e.g. If you put some money into RRSP, or if you have any child tax benefits for example.

Hope this help.

I just want to clarify the pricing I stated above as there seems to be a lot of confusion. If there was any misunderstanding, I am deeply sorry. For $20 you can ask multiple questions using HandyWise, as long as you can fit in all your questions in the space given by HandyWise. HandyWise will then sent your message to my email. You can also sent email direct to us, for $7 per short question, and $20 per long question as of this year. Of course, you are always welcome to ask question in the comment area, for free.

I’ve incorporated my small business and would like to pay myself via dividends. I’m a independent contractor. I work for a different residential customer everyday (ie don’t subcontract to the same a large company). I do my own marketing, website, etc. and offer a very unique product. I am the only employee at this time. My current accountant disagrees with my thoughts I qualify for the Small Business Deduction as he thinks I’m a Personal Services Business. Can you shed some light on my situation? I’m considering getting an Advance Tax Ruling to prove my case but could use a second opinion first.

Hi Tim,

Have you asked your accountant the reason why he believes your business is a PSB? Often the decision to consider your business is a PSB depends on a case-by-case basis, so it is hard to say if yours is a PSB with not too much information, so your accountant must have a reason for the decision. CRA is putting a close attention on this matter recently especially on independent contractors. I would suggest consult with your accountant first before getting an ATR, it can be a very expensive and very lengthy process. Although you can withdraw your ruling request if the ruling are not favourable to you, remember CRA will still retain all your documents.

Thanks for your quick reply. I’ve corrected my accountant on a few things before which has perhaps weakened our relationship. I’ll be looking for a new firm to represent me but I still need to understand if I’m at risk. He did talk generalities and in circles during our discussions but I asked for specifics today and he gave me two reasons. One, I have less than 6 employees and two, the business itself would shut down if I was to leave for an extended period. I asked for more specifics on the later comment as I’ve never seen reference to that situation anywhere. On the number of employees, is this true? Wouldn’t most small business NOT qualify if this was true? ie electricians, plumbers, even many small accounting offices have less than 6 full time employees. The reason I’m asking this on your board is that it does have implications to your articles/readers (as well as I need advice).

Hi Tim,

Both conditions your accountant mentioned is true. However there are more to consider, for example, how many customers do you have? Do you only have a few, or worse off only have one? How do you invoice your customer, is it regularly with the same amount? Do you charge your customer by hours? Does your customer provide office suppliers for you such as a computer and a desk for you to use? These are just a few example to take into consideration to determine if your company is a PSB. Having said that, all these conditions will be wavied if your company has more than 5 employees, this will 100% ensure your company is not a PSB. Accountant has an obligation to maintain a good standing with the government, that means to ensure their clients they represent do not owe the government money, so your accountant is just being safe. It is better to pay more tax to the government and get a tax refund rather than having the government come and fine the clients later. Of course if you file your own tax, or sign a waiver with the accountant (which most accountants do now) so the risk is on your side, you can take a chance to make a decision rather than having your accountant make all the decision for you. In that case your accountant will give you advice, but the final decision is yours. Since you said you serve different customers, and go to different customers to conduct business, assuming your revenue doesn’t exceed 400K, and your major income doesn’t just come from one customer, you should qualified for small business deduction.

Thanks very much for your reply. After reading both the income tax act itself and the interpretation bulletin I cannot find his claims anywhere. There are two instances that make reference to having more than 5 employees but these are listed as EXCEMPTIONS. (If you are an ‘incorporated employee’ OR if your company is a ‘specified investment business’ you can still qualify for the SBD with more than 5 employees.) It doesn’t state anywhere that every business requires 5+ full time employees. That just wouldn’t make sense. A Tim Hortons with 25 part time and 3 full time employees not qualifying???

I fully explained to my accountant I work for a different customer virtually everyday. (Some jobs are 2 or 3 days long.) I have little repeat business with the same customer. I supply my own tools. (My process is unique and I’ll be trying to file a patent to protect it.) I have my own computer, my own website, do all my own advertising for new clients. I set my own hours. I invoice each customer and that invoice is determined by the size of each job. There is no middleman setting up my work for me. I don’t know how this could be seen as a PSB. I do not believe there is one area of my business that is questionable.

As a layman (with some research) I’ve convinced myself I’m definitely not a PSB. For my accountant to suggest I am without listening to my counterarguments tells me his is incompetent, dislikes me personally or not interested in my business. In any case it sure wasn’t professional to suggest I was doing something illegal. It’s not my intent to file false claims, but I am entitled to reduce my taxes to the fullest extent the law will allow.

I do thank you for your input..I very much appreciate it and your website. Do you work with businesses in provinces?

Can you pay yourself monthly loans and if so do you need to file a record of the loan agreement every month and state the minimum interest (say 1%) plus the period 1 year for example. At the end of the year you can you take a dividend payment from the company to pay back your loans or just take another loan? Are there any benefits to this or is it beter just to pay dividends to yourself each month/quaterly? (based on a start up inc. making $4-6k month – would this change if when the income rises to 12k per month).

You can certainly take out money to yourself as a loan every month, and yes you will need to issue a loan agreement from the company to yourself just to keep record. If at the end of the year, you can pay back the loan if you have issued dividend from the company. However I would not recommend this method as an ultimate solution, regardless of your company’s income level. The draw backs of this method have a few. First, the dividend are after tax money from your company, and the dividend will be count as your personal income, so you will need to pay tax on them. Second, when you take out a loan, that loan is not being classified as expenses, it is just account receivable, that means you still need to pay tax on those money you give yourself as “loan”. Third, when you pay back those 1% interests into the company, those interests are income for your company, hence you will need to pay tax on those interests income.

Cecilia

Hi Cecilia,
First off, thank you very much for your articles. I’ve been grateful to have found them as I am a novice at understanding all this.

I have recently incorporated myself in order to take on a contract job as a web developer. I am the sole person of this corporation. I don’t expect to incurr any operation expense along the way. Everything is quite straight forward and I would like to take the options that would result in simplest accounting at year end.

Can you please let me know if I’ve got it right.

1) I can write business cheques to myself at anytime, at year-end I can tally that amount up and account it as dividends to my personal self, correct?

2) I have not yet registered for a GST number as I anticipate I will not make more then 30K. However, should my contract get extended then I will need a GST number, at which point do I have to retro-pay the GST from the beginning or do I start from t he 30K on?

3) As a corporation, I will have to have the corporate taxes done by an accountant or can I do it myself?

4) Is year-end taxes due at the anniversary of the corporation or at the same time as personal tax income?

I’m sorry these questions are quite elementary. I’d deeply appreciate your advice.

Hi Kristin,
I am glad you found the article useful. I am sure a lot other people have the same questions as you and will find this post useful. So, thank you for posting your questions.

1) Yes, you are correct. You can tally up the amount you give yourself over the year as dividend. However, if you will need to pay tax on the full business income, so if you business income minus all expenses at the end of the year is $20,000, you will need to pay tax on the $20,000 regardles on how much you pay dividend to yourself. To prevent a lump sum tax at the end of the year, and interests, I usually recommend my clients to pay instalment over the year.

2) The GST starts on the transaction that causes you to go over the $30,000 mark. E.g. You earned $2500, and then you have this contract that you issue an invoice to your client for $600, you will need to issue an invoice of $600 plus GST, even though the first $500 still lies within the $30,000.
Just in case you don’t already know, since your company nature is service, you only charge GST, no need for PST.

3) You can do your corporate taxes yourself, as long as you know which forms to fill out and how to fill them out. It is not as simple as filing personal tax however. You will need to know how to generate your financial statements, namely income statement (also called profit and loss statements) and balance sheets. You will also need to know what is in your balance sheet and income statements you can claim, and what you can’t. We do corporate tax filing as well for a reasonable price, however we only serve Ontarians at this time. If you are interested please do not hestitate to let us know.

4) Corporate taxes is due by the end of your fiscal year, that means if you incorporated your company on July 2009, your fiscal year end on next year June 2010. If this is your first year incorporated, you can chose your fiscal year end. For example, if your company incorporated just now, July 2009, you can chose a fiscal year end the same as calendar year end, you can do so by filing your taxes from July 2009 to Dec 2009, and declare Dec 2009 as your fiscal year end.

Hope this help.
Cecilia

Hi Cecilia,
Just to follow up the thread: I work as self-employed, but I have a company to get the job. So I plan to let the company pay everything including the GST to myself as self-employed, and then claim everything on my income, the company will have 0 balance so the corporation tax will be super easy?

Let me know when you are open for BC tax fillings…..

Have a nice weekend!

Wei

Hi Wei,
You can do that, but that defeat the purpose of having your company incorporated, you are not taking advance of any tax savings with your company incorporated at all. If you choose to pay yourself all of the income as personal income as you mentioned, I would recommend a change of company structure to sole proprietor instead. Also note that in terms of corporate liabilities, most rulings are often results in personal liabilities from the owner, so the separation or “protection” from corporate liabilities and personal liabilities highly depends on your situation and the court decisions, it is not 100%.

Cecilia

Cecilia,

Do you mean the company tax+personal tax is better (save $$$ and/or easier) than the self-employment tax?

Since 2008 I paid my company expense out of my own pocket, I though I can claim reimbursement from my company and also claim as company expense, but was told this is not the right way, I should have used company check company credit card to pay the company expense, that is why I am thinking about claiming as self-employed…..not sure whether this is true though….

Thanks a lot!

Wei

Hi Wei,
I mean, self-employment tax = personal tax. You can claim reimbursement or claim as company expenses. A simple example may help you:
e.g. You purchased $10 pans from your pocket (it can be personal checking account with debit card, your personal credit card, cash, personal cheque)
Option 1: You can claim $10 reimbursement from your company to yourself.
Option 2: You can claim $10 as self-employed expenses
You can only do Option 1 OR Option 2, you cannot do them both. Both Option 1 or Option 2 are “right way” as well.

It is better to use company credit card or company checks to pay for company expenses, but it is not a matter a “right way” or “wrong way”, it is a matter of what is easier in terms of doing bookkeeping and accounting work because then you don’t need to worry about transactions between personal and company. If you hire an accountant or bookkeeper and they charge by hours, then trying your best to separate your personal and company expenses can save you money because your bookkeeper or accountant does not need to spend more time to deal with your “cross-transactions”.

I hope this help.
Cecilia

Hi Cecilia,

Really appreciate your answer. If I invoice my own company and claim myself as a self-employed, do I have to pay EI and CPP? then this will be a big loss compared to get dividend from my company, right?

Also, if I have business loss for my self-employment, but the loss is less than the total of my other income, will I still have the option to carry the loss forward?

Thanks!

Wei

Hi Wei,
If you claim yourself as self-employed, yes you do have to pay CPP, but not EI. CPP doesn’t cost that much and it also act as a long term disability as well, so I wouldn’t say it will be a “big loss” but yes you do need to pay your CPP.
For your second question, the answer is yes, you still have the option to carry the loss forward.
Cecilia

Cecilia,

If I want to carry on the expenses for 2009, and I did not claim them on 2008, does that mean I have to adjust the 2008 T1, or I can do it on 2009?

Thanks!

Wei

Yes you have to adjust the 2008 T1. The adjustment form is actually very easy to fill out, if you have a lot of 2008 expenses then it is definitely worthwhile to fill in the adjustment form.

thanks! How can I show on the adjustment that I want to carry on the 2008 expenses to 2009, not use it against 2008 income?

You don’t carry on the 2008 expenses to 2009 unless you have a loss in 2008 with those expenses. In the adjustment form, adjust T1 line 162 and 135. You also need to adjust the expenses information for T2125 form, with all the lines apply to your changes. If you have a loss, this can be claim as non-capital loss, and your adjustment will also need to include changes in this line as well. For more information on non-capital loss you can go to http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns248-260/252-eng.html.

Cecilia

Thanks a lot! So for the expenses, I use the corporation approach or self-employed approach, should be the same? I mean, are there any expenses which corporation can claim but not for self-employed, or vice versa?

Unless your company is very large and have a complicated structures, public companies, lots of shareholders, etc, pretty much any business expenses you can claim with corporation can also be claim for self-employed, or vice versa.

Hi Cecillia,
Thank you for this great resource. I just have one quick question for you. My husband and I incorporated a company the beginning of September. We will be paying ourselves dividends. We were planning on using a PHSP for our healthcare expenses. The company will be funding $10000 per year toward this account. My questions is: Do we need to be employees in order to receive this tax-free benefit or are shareholders also allowed this tax-free benefit? My husband is set up as the President of the company. Is he considered an employee? Will he be able to get this health benefit as the President of the company? In order for the President to be seen as an employee, does he need to receive a salary? or is it acceptable to only be paid in dividends? Thank you for your time.
Annanie

You may want to consider enrolling in payroll. In order to be considered as employee, the person must be in your payroll. Any individual or self-employed can claim the medical and disability tax credit, however the total amount of medical expenses have to be over a certain amount, for 2008 this amount is $1962. So if you want to take advantage of the tax-free benefits, dividend will not do you any good in this regard. To answer your question, if you want it to be totally tax free, yes you and your husband will need to be employees. Your husband is not considered an employee until he is in payroll, that is, he is receiving a salary.

In regards to paying dividend. Starting from this year in 2009, for us who live in Ontario, due to a change in tax rate, paying dividend or salary doesn’t make much of a different anymore. In fact, paying salary may even results in more tax savings.

Cecilia

Wow…I have spent about 4 hours searching the internet for useful information on this topic and finally…this looks like a wonderful web site, with all sorts of good stuff. Thanks.

I am a bit confused though. I am a CCPC making use of the “small business deduction” which of course provides very favourable tax rates. I am the sole director and shareholder. I am not an employee of my corporation. I have been doing a lot of reading today with regards to can I pay myself a dividend from the corporation. Based on what I have read it seems to me that my corporation is not eligible to pay out dividends since it makes use of the small business deduction.

Is there something I don’t understand?

Thanks…Tracy

Hi Tracy,
I am glad you found this website informative. As long as your company taxable income is less than half a million dollars you can make use of the small business deduction. If you taxable income is on or over $500,000, paying yourself salary can lower your company taxable income and may be elgible for small business deduction. If you are already making use of the small business deduction, paying dividend would not make you not eligible.
Cecilia

Thanks for your quick response Cecilia….very much appreciated.
I think this is an important factor that should be considered before “paying yourself a dividend” in the First Option of this article.

Hi Cecilia,
I have recently incorporated. My business resides in BC and makes around 100,000 CND per year. I work from home and the money comes from two american clients. The Clients pay the majority of my expenses as well. Now, as i read through the blog it is becoming apparent that there will be no taxable benefit to me having my corporation pay me a base taxable salary and some dividends over having a sole-proprietorship and paying personal income tax on the 100,000$. Is this true? To make this company structure worth while do i need to generate more expenses thereby reducing profits? From my understanding, legally, for all purchases made by my company i am still only able to claim the percentage they are actually used for business needs, correct? ie $10,000 car is used 20% business therefore $2000 of purchase price is claimable by the business:). Maybe if i expand into other faucets ie A company is allowed to invest and buy mutual funds, houses and property is it not?

thanks and appreciate the time

The real benefits for a small business to incorporate is to take advantage of the low corporate rate. That means you can enjoy the low tax rate benefit only if you keep as much money in the business as possible. If your business is making 100,000 a year, and you pay yourself as “personal income” regardless of how you pay yourself, the full 100,000, you are correct, you have no benefits doing so at all. Investment such as mutual funds or real estates do not consider business expenses unless your primary business is an investment company. Setting up an investment company has some restrictions and it costs a bit more. Expenses have to spend somewhere, to avoid tax by increase expenses that is not necessary for the business or in anyway help the business grow is not worth it.

Hi Cecilia,
I have just recently incorporated. I am the only director and shareholder. I was planning on giving myself a lower salary and then expensing what I can to make up for it. Can I take dividends as well as a salary?
Also, If I put my husband as a shareholder, can I pay out dividends to him to make up for my lower salary?
How often do you give out dividends – is this done yearly?
Thanks for the help and for your articles – they definitly help us who have no clue. Appreciate the time you take to help us.

Yes you can take both salary and dividends, and yes, you can pay out dividends to your husband if he is also a shareholder of the company. You can give out dividends anytime during the year, you just need to file T5 slips with the total dividends to distribute over the year, just as you would file your T4 at the end of the year.
Hope this help.

Hi Cecilia,
great site and wonderful information, thank you
like a previous comment I have been surfing around for hrs until I found you !
I have a question regarding vacation pay for owners
we are a corporation and pay ourselves a salary
do we accumulate vacation pay like we do for our staff
can we accrue if we don't take it ( like when will we have time to take off ! )
can it be carried forward over the years etc
do we have to take per year like our staff

This is proving a diffficult one for us to find an answer to
any info will be greatly appreciated

regards
steve

Hi Steve, I am glad you found my site and found this site useful to you.
Regarding your question on vacation, you as an owner of the company, it is up to you to give yourself vacation and set the rules. In terms of vacation pay, it is not a CRA issue, it is more of a labour law issue. There is an Employment Standard Act (ESA) set by the the Ministry of Labour in your province. This Act governs the rights of employees, such as minimum wage, sick leave, etc. However, just like any law, someone needs to initiate a lawsuit. If you are the owner of the company, I doubt that you will want to suit yourself or hopefully not your spouse on violating the ESA. In fact, most owners of the company would not take any salary out of the company if there's not enough to pay yourself. For employees though, you as a business owner have the legal responsibility to pay employees their wages and treat them at least according to the ESA. Here is the link to the ESA on what business owner needs to know for Ontario: http://www.labour.gov.on.ca/english/es/pubs/bro….

So to answer your question, if you want to set your payroll with the vacation payment like your staffs and allow accrual, you are free to do so, there is no set rules in this regards, you can set your payroll without giving yourself any vacations. You can find more information on how to set up vacation pay to employees here: http://www.cra-arc.gc.ca/E/pub/tg/t4001/t4001-e…

Hope this help.
Cecilia

Hi Cecilia,

I have been incorporated for three years and, until now, I have been paying myself completely as salary. My 2010 year is looking very good, so I want to change to paying myself part salary and the rest as dividends, for obvious reasons. I have the following questions:

1. Can I pay myself dividends as soon as there is money in the company or do I have to wait until my year-end?

2. Do I have to remit personal tax to CRA as I do whenever I make a salary payment?

Depending on your answers to theses questions, please comment on the following strategy:

My year-end is September 30. I intend to pay myself as much as I can (within reason) by the end of September, 2010. Then I can help my son buy a house. I will not pay myself anything until January at the earliest, so I will not have to pay any more personal tax this year. I will start paying myself dividends as soon as I can in 2010. As I approach my year end I will start to pay myself salary, up to 100K or so, so I can max out my RRSP. If I have more in the coffers at the end of the fiscal year, I will pay my daughter dividends. She is not working and so will pay very little tax, if any.

Best regards,

Peter

Hi Ceclia,

I found the discussions on this webiste very useful and interesting. It really answered many of my questions. However I have few more questions and i'll appreciate your response to them:

1) my uncle incorporated his busines in Oct 2008 and since he was not aware of Canadian tax system he simply filed the 2008 corp return as “NIL” even though he had some income and expenses. – My question is does he have to amend the 2008 t2 return or include the income in 2009 t2?

thank you
Sameep

Hello,

Thank you very much for an excelent information many business owners would benefit from.

I would like to ask you about the split in between salary, loan and dividend that often corporate owner that is also the only employee of the corporation, may consider. In particular:
My corporation accumulates and plans to have $60,000 of disposeable income (after all deductions, before taxes) at the year end. Also my corporation follows the personal tax dates (start at January 01).
I would like to pay myself at the best possible way:
- if I pay myself a dividend of $48,000 (a $4,000 a month), the corporate will pay ~19% of this as a corporate tax, and about 4,5% of Federal + Ontario combined personal tax. So, my corporation will pay 19% off total net income of $60000 ($11,400) and I will pay $2,133 (total = $13,533).

- if I split that $4,000 to $3000 as dividend and $1000 as salary, I may have to pay 19% off $48,000 (since my corporate income is diminished by salary) and personal income tax will be $3,723. So, total corporate and personal taxes will be $9,122 +$3,723 = $12,845

Of course this calculation will vary based on individual situation, but assuming single owner, no tax credits etc. the split doesnt give us that much. And we cannot pay ourselves EI premiums as well (there are maybe some gains on CPP front, again depending on contribution based on salary).

Is this right? Am I missing something? What is the best strategy to pay a business owner (assuming there are no additional tax credits) and splitting between dividend, salary and loan, so total taxes are the lowest at the end of fiscal year?

A question related to this toopic

am hold 100% share of my software consulting business (incporated),
and my last year net income is, say 10,000$ (before tax), I used
QuickTax for Incorporation to calcualte that if I don't myself
anything, the tax is around 1,800$. Thus I would assume I am able to
pay myself at least 8,200$(10,000-1,800) as divendend.

However, when I use QuickTax softare, I key in 8,000$ as the amount of
dividend paid in Schedule 3, it automatically create 1,600$ extra tax
I need to pay, looks no matter which amount I pay as dividend, it will
ask for 20%*dividend as extra tax on top.

My question are:

1> Do I need to claim how much dividend I pay to myself when filing tax return?
2> if yes, is it correct calculation for QuickTax to charge
20%*dividend as extra tax? I thought it SHOULD NOT, since the dividend
amount I pay to myself is after-tax net income, but I don't know what
I did incorrectly to cause QuickTax charge 20%*Dividend as extra tax.

Thanks a lot,

Hi Peter,
I hope I didn't answer your question too late as you were planning for 2010.
1. You can withdraw money anytime from your company during the year, you don't need to wait till the end of the year. At the end of the year, you just need to add up how much you draw from the company that are “dividend” and submit a T5 form.
2. Dividend payment doesn't require remitting personal tax like salary.

First, if you are planning to get a mortgage to buy a house for your son, keep paying yourself salary as much as you can until you have the mortgage 100% approved. You may also want to wait till your T4 is issued before you decrease your salary.
Second, regarding the dividends tax benefit, Ontario has changed the small business tax rate, which makes paying salary a little bit more beneficial then dividend. Of course there are circumstances which paying yourself dividend maybe more appropriate. So if you are Ontarian, you may want to continue paying yourself salary.
For RRSP, just a reminder that your RRSP contribution room is calculated according to your personal income. That means, if you decrease your personal income, the RRSP contribution room also decrease.
Finally, paying your daughter dividend means that she needs to be a shareholder of the company. So if she hasn't been a shareholder, add her to your company and issue a T5 for her. Depends on how much you are paying her. If you are paying her less than $10320, then she doesn't need to pay a cent of tax.
I would also want to suggest paying into a Trust instead of dividend. Trust doesn't really give you tax benefits, however most parents who would want to distribute money to their children, but still want control over how and when they can use the money, trust is certainly a popular option for parents.

I hope I answer your question.
Cecilia

Hi Sameep,
I am glad you found my website useful. I will continue to keep up and provide you more useful information in the years to come.

Were the expenses enough to offset the income? If the “profit” are closed to 0, then don't even bother amending. If the profit is significantly higher or lower, then I suggest him to do an amendment on the 2008 T2. He cannot include the income and expenses from 2008 to 2009.

Cecilia

You are right the differences are not much, depends on how much penny you want to pinch. If you are in Ontario, starting in 2009, paying dividend actually results in a higher tax rate. Again, this different is only around 1%. So if you are in Ontario, you may want to pay yourself salary.

As I suggest to all of my small business clients, the best way to pay yourself is to pay salary according to the estimate personal expenses for the year, and leave the rest in the business account. However, the dividend and loan strategy often comes in to play when some common situations occur, such as the owner need to use more money then they have in the personal account with salary payments, and take money out from the business in an ad hoc basis; or if the business experience some cash flow issue, stopping salary payment is often the action so that no remittance will need to be pay for those periods to get the necessary cash the business needs urgently. A loan in this case may be more appropriate. But if none of these special situation occurs, then paying salary is the best way to go in my opinion.

Cecilia

Hi Tom,
The T2 forms and schedules wordings can be somewhat confusing. In general for one-man small business paying yourself dividend, you shouldn't need to fill out Sch3 as the dividend you paid are not for the refundable purposes. The T3 schedule is mainly for company that has invested and received dividend income to declare dividend or claim dividend tax refund. If you want to fill out Sch3 in QuickTax, in Part 3, fill line 450 with the dividend amount you paid yourself, you should see that the result is 0.

I hope this help.
Cecilia

Thanks for your response.

One thing is confusing me. You state that “Ontario has changed the small business tax rate, which makes paying salary a little bit more beneficial then dividend.” This seems to contradict other things I have read on the net. For example: http://www.sfgroup.ca/Documents/2009ontbudget.pdf

I have also run several scenarios through Quicktax 2009 and it seems that dividends are better in every case. Also, the more one pays oneself the bigger the benefit. Am I missing something?

I intend to pay myself part salary and part dividends. The salary amount will be enough to maximize my RRSP contribution and the rest will be as dividends. I have an added reason to have some salary, since I put in SR&ED claims each year.

Comments please.

Peter

Thanks Cecelia. Yes since it was the first year of business so it had a net loss of 3000approx. I was just concerned of loosing this losses which. May be valuable going fed but I agree with u that amending t2 is not worth the time spent thanks once again

Sameep
Sent from my ipod

Cecillia, this thread has helped me and probably many more people as some have commented.
If you could please help me understand and answer a few more questions I would dearly appreciate it.
Scenario: Starting a business, however am not certain if it will work or if I will choose to have other business
ventures in the future. For this reason, I have chosen to start “last name” corp. To have a more perfessional
name I will register a DBA and do business that way. If in the future I wanted to expand, I would just need to regester
a new DBA.
Questions: (In Ontario)
1. Do I invoice and represent myself just as DBA without mentioning it is a Corporate Division?
2. Other then potential corporate tax benefits, why would someone want to keep net profits in a personal Corp?
Why not pay out the full amount? Seems odd that I would just “save” money in the corp when I could
be using it for personal expenses and entertainment. Is the gain long term?
3. With the above info, if I wanted to just take all net profits is Salary or Dividend best?
-I was thinking Dividend based on not knowing how much I would be making month to month.
4. Can I take Dividends based on a % of net? Can the % be changed freely at any time without having a sharholder meeting (self)
5. If using Salary, what happens if the Corp runs out of funds? Is there a way to continue paying yourself?
If you do continue and the corp gains a loss and is forced to shut down, as the sole owner of the corp, does the loss come back to me?
6. When paying yourself using either of the two methods mentioned above, how do you document the payments?
7. On a personal part, you pay personal taxes, even on dividends.. correct? As a corp, what is it responsible for paying on top of
taxes? EI? Would I need to register with WSIB and make payments to them?
8. Are paying corporate taxes expesnive at year end? Personal could be 50-100, what is a general/avg fee for a simple Corp?

I am sorry some questions are not related directly to paying yourself, however having a real difficult time finding any answers anywhere else. Thanks in adv.

Wow, thanks for the GREAT information. I have a question for you. I am a shareholder in my husbands corporation, he has 51% of the shares and I have 49%. Our accountant set us up this way. When my husbands company was created I was on Maternity Leave with our child and she said this would be fine as long as now renumeration was paid to me. It wasn't. I have since then received a notice of debt from the government. My question is…… Can i collect EI and be listed as a shareholder in a corporation? I have worked out of the home for other companies other than my husbands and have NEVER been issued a t4 or a T5 from his company, no monies ever paid to me.

Thanks for your time.

What a wealth of information!

I have been incorporated since last May. I am the only shareholder. I have put myself on the payroll and currently have approx. 45K in profit. Now that it is tax time, I would like to declare a dividend so I may purchase some RRSP's for about 15K.

1. How do I declare a dividend, what paper work do I need?
2. Do I submit any taxes this year for the 15K?
3. I know I have to fill out a T5, what boxes do I fill out.
4. How do I know if the dividends are eligible or other than eligible?

Thanks,
Nancy

Great site…thanks Cecilia…you are a wealth of small business knowledge…. I am the only shareholder in my incorporated Comapny and so far most of my income has come from one client. I have not paid myself any salary or dividends as this is my first yr in business, and I wanted to strengthen the Company before drawing a salary….I have a quick question….

I have been submitting detailed monthly expense statements (quarterly) with receipts and mileage logs to be reinbursed for my expenses. Travel, vehicle, parking and meals. I chose this approach to keep the separation between Personal and Company as clear as possible. the company does NOT have a credit card at this time. Can you comment on whether this tracking and reporting approach is considered acceptable? I charge $0.55/km for the vehicle/INS/Fuel?….etc and $30/day for a meal allowance…

This business operates in Alberta and I plan to pay myself through dividends for the 2010 year….

Thanks
Enzo

Hi Cecilia,

I incorporated my business June 2007 and have one customer. I am an IT business analyst, paid through my corporation and have been using the money from my corporation for personal use. I have not filed my corporate and personal taxes for 2007, 2008 and 2009. I have however sent instalments to Revenue Canada because I collect GST — they have given me until March 31 to file my 2007 GST/HST return — I don’t have a problem with this.

To file income tax returns (personal & corporate) I have to choose a method of payment. After reading your article, thank you, dividend & salary method are out because of the government penalties for filing T5 and remitting payroll late. Am I correct in my assumption? Filling a T5 for 2007 and 2008 will cost me $5,000 not to mention that I will also have to pay a penalty for 2009.

So my only option is to categorize that money I have been taking from the corporation from 2007 as a loan. I have 100% ownership of the company and the sole director. Please advice, I am desperate and really stressed over this. I am a procrastinator, and it has cost me greatly throughout my lifetime.

Thanks in advance.
Emilly

Hi I am a stay at home recently single and would like to start up a home business I am not expecting it to get very large just a couple clients a week and I was wondering what the best way to do this would be. Thank you

Hi Cecilia,

I'm glad that I found your website and it's very useful. I found some similar questions as what I have now, but I'm still a little bit confuse. My husband incorporated himself and he is working as a contractor through his own corporation for an engieering company. He wants to pay himself salary each month as well as the dividends at the end of year. He also registried payroll account in CRA. What should his company deduct from his pay check? EI, CPP and Income tax? At the end of year, his company issues him a T4? If the company pays him EI, when the company losses the job contract in the future–he has no income then, can he apply for EI?I'm confused about this.—Is he an regular employee or self-employee? And also if he wants to put me in his company to get some dividends, which is the best way to do it—I mean how to make up the shareholders' percentage?

Thanks a lot.

Cathy

Hi Cecilia,

I'm glad that I found your website and it's very useful. I found some similar questions as what I have now, but I'm still a little bit confuse. My husband incorporated himself and he is working as a contractor through his own corporation for an engieering company. He wants to pay himself salary each month as well as the dividends at the end of year. He also registried payroll account in CRA. What should his company deduct from his pay check? EI, CPP and Income tax? At the end of year, his company issues him a T4? If the company pays him EI, when the company losses the job contract in the future–he has no income then, can he apply for EI?I'm confused about this.—Is he an regular employee or self-employee? And also if he wants to put me in his company to get some dividends, which is the best way to do it—I mean how to make up the shareholders' percentage?

Thanks a lot.

Cathy

Eric,

I live and run a small newspaper delivery business (.Inc) in Ottawa. I use Quickbooks 2010 pro to do my bookeeping, and Ceridian Powerpay to pay independent delivery contractors.

I only have 1 client (The newspaper company), and my expenses are mostly vehicle/office related. What do I need to do if I chose your company to file my T2 tax.

Please let me know by email: < info@jobizco.com > OR (613)728-1999.

Thank you (Your Website has been very helpful)

I will not be available from Wednesday Oct 27th to Nov 12th due to a scheduled surgery.

For urgent matter please contact my associate Doug Wereley at doug.wereley@wizebiz.ca.

I will check email from time to time, if it is not an urgent matter please feel free to sent me an email,

I will try my best to response to your inquiries.

Best Regards,

Cecilia Leung

Should you pay yourself what you need to cover expenses? What your business can afford? The salary you left behind to launch your business?

Hi Cecilia…just back visiting your wonderful website again and re-reading your response to my small business deduction question. I think I mis-read it the first time because of the use of the double “not”s. My corp taxable income is less than $500,000. Can you please confirm that it is ok to pay myself a dividend and my corporation would still qualify to use the small business deduction?
Thanks so much…Tracy

if you taxable income is less than 500,000, you are consider small business. Dividend or not will not affect the small business eligibility.

Thanks again Cecilia! I noticed the great services your company is offering. I am seriously considering one or more of them.

I quote your blog here:

“You can certainly pay yourself as you are a self-employed person. The catch of this method is that you will need to register yourself a business number for your self-employee business. So now you have two business, one corporate, and one sole proprietor with two business number, and if you want to collect and claim GST, PST, or import and export, you will also need to register separate accounts for each business. When you file your personal tax, the amount invoiced to your self-employee business and your business expenses can be reported in form T2124 Statement of Business Activities or T2032 Statement of Professional Activities. (You can find this forms in the CRA website).

Hope this help.
Cecilia”

I have been paying myself in this exact manner since 2006. The CRA has contacted me to review this and says it is not allowed. I must pay myself either by dividend, loan, or salary. I would like to continue as self employed sole proprietor and pay myself accordingly from my corporation.

Where does it state in The Income Tax Act that I cannot do this?
thx!

I've been invoicing my corporation as a contractor and the corp issues me a T4A annually.
I have an upcoming meeting with the CRA, as they are taking the position that I cannot pay myself this way and must use of the above methods. I have read in another of your forums that you CAN pay yourself as a self employed contractor. I will be appealing the CRA's decision and need as much documented support as possible. I'd love to hear some comments on this!

In a few years I plan to stop working and no longer inject income into my CCPC (IT Consulting Services). To date I have been the sole director and common share holder, no Salary paid and only 2 years where the CCPC paid me via a Dividend. My CCPC Retained Earnings have grown and I don’t plan on selling my CCPC or leaving it as a legacy. I now believe I should begin planning a depletion (payment) of those retained earnings before there are personal tax implications due to future sources of income such OAS, CPP (from earlier employment contributions prior to my CCPC) and RRSPs(becoming RRIFs). And I believe it would be beneficial to deplete the retained earnings before I begin the process of dissolving the corporation, at which point any cash remaining in the corporation would still need to be paid out. It is my understanding that the 2 ways of being paid/depleting the retained earnings are via Salary or Dividends. I am considering the Dividend route since in my situation it will be taxed more favorably than Salary. Another consideration is to issue(sell) another common share to my husband, who could then also receive the equivalent amount of declared dividends. My husband and I currently have only minimal investment income and we have lived off of existing savings. We would have the CCPC declare dividends to the extent that it is favorable for our personal tax year. Here are my questions:
1. In my situation, would payment of annual Dividends be the most tax favorable method for depleting the CCPC retained earnings, before dissolving the corporation? Or is there some other method I should be considering in conjunction with paying Dividends? For instance, is there a way to pay the retained earnings as a “taxable capital gain” in order to apply against an individual’s previous years capital losses?
2. Are there any CCPC CRA issues with CCPC dividends being declared in a year when the CCPC has made no active business income and still has Retained Earnings?
3. I realize that by issuing a common share to my husband he will have an equal shareholder vote. Even though I am not concerned with this, are there advantages to instead have the CCPC set up a 2nd class of shares for issuing a share to my husband? One advantage I can think of is the ability to declare a different dividend for each class. Is it ok to have Common A share and Common B share classes and each with a different dividend payout?
4. Are there any CCPC CRA issues with only “annual” dividends being paid out year after year to shareholders, and never a Salary paid?

Hi, I have worked for many years as a sole proprietor consultant and claimed on my personal taxes.  I have just been offered a new contract however the company only wants to pay to my company if I agree to incorporate.  I would like to like to open the corporation as a new entity and invoice the corporation from my sole proprietorship.  I would like to invoice for 100% of what is paid to the corporation and continue to show all my expenses at the sole proprietorship level.  Is this acceptable?