How to Pay Yourself – Corporation
This is one of the most common questions for small business corporation owners. So it is year end, you need to file your personal income tax, what to do? You have been taking money out of your business account for personal use, pay your bills over the year, and now what?
It is different when you are a sole proprietor, which you file your tax as self-employed and no slips to worry about unless you hired employees throughout the year. Now since you incorporated your company, you are a shareholder of the company and things are a little different.
First and foremost, the deadline for issuing T-slips (T4, T4A, T5, T3, etc) is LAST DAY OF FEBURARY. That applies to both you and your employees if you have any.
You can pay yourself in 3 ways: Dividend, Salary or Loan
Most of the time when clients come for filing tax without setting up payroll for the year, I would recommend filing individual income as dividend income. Dividend is the money the company distributed to you as a return of your investment. Usually dividends are distributed according to the number of company shares you own. Of course, the company can decided to keep all the earnings to re-invest in business operations and business expansion, and hence no dividend is being distributed to shareholders in this case.
Enough of the shares, so if you are a small business owner and you own 100% shares, how do you pay yourself?
First Option: Pay yourself DIVIDEND
- Calculate how much you take out money for yourself from the company for personal use items over the year
- Fill in the T5 Summary for the amount you pay yourself.
- Fill in the T5 slips (contains 3 slips per page).
- Send one T5 slip, along with the T5 Summary to:
Ottawa Technology Centre
P.O. Box 9633, Station T
Ottawa ON., K1G 6H3
- Keep the rest of the T5 slip (one should be for your company’s record, and one for you to file your individual income tax return)
Now you get the concept. You do the same for each shareholder if you have multiple shareholders who also took money out for personal use during the year without payroll.
If you are interested in the details, you can get more information on how to file a T5 on the Canada Revenue website T4015 T5 Guide – Return of Investment Income.
Second Option: Pay yourself SALARY
The first thing you need to do to report salary is to register your company a payroll account with CRA. This can be done by calling CRA directly, or have your accountant / tax preparer to register for you. The rule is that once you have your payroll account setup, you have to sent your deductions on or before the 15th day of the month after the month you paid the salary.
Deductions mean – using the payroll table / payroll online calculator to calculator how much tax, EI and CPP you will need to deduct from your paycheck. These amount in total (tax + EI + CPP) is called payroll remittance.
Once you have your payroll account number, and calculated how much you pay yourself over the year, and how much deductions you owe over the year:
- Write a cheque or money order payable to Receiver General
- Write your BN number at the back of the cheque / money order
- Write a letter stating that:
- You are a new remitter
- The period of your remittance covers
- You company information (Employer name, address, phone number, BN number)
- Send your first payment a cheque or money order to the tax center (you can find your tax center in the CRA website http://www.cra-arc.gc.ca/contact/tso-e.html
Usually the first remittance do not incur penalty and interest. However, if you cannot pay all the tax, CPP and EI over the year all at once, then penalty and interest will apply as late remittance. Once again let me remind you that penalties and interests are accumulated and compounded daily.
Third Option: Give yourself a Loan
This one should be easy to understand. This means the company lends you the money, and will expect you to pay back the company with interests and principals for a duration of time. The taxation on loans and interests can be complicated in this situation. Different conditions can make a different on how to handle the suituation. You can always consult a professional to help you on your situation. Anyhow, in here I will give you the most simple way to do this.
- You need to pay at least the prescribe interest rate set by CRA, you can find this prescribe rate at www.cra.gc.ca/interestrates
- Issue a formal loan contract between you and the company
- Pay back the company accordingly
If you don’t plan to pay back the loan and interests accordingly, the accumulated interests according to the prescribe rate over the period of your loan, and the loan principal will become taxable income to you.
Need Help On Bookkeeping? Still Confuse on How to Record Your Mix Spending? Contact us, we are here to help. 1-416-628-2036, firstname.lastname@example.org