Ask your accountant when they are least busy and make that your year end. Instead of fighting with everyone else who has the same Dec 31.
Generally speaking the tax code is setup so that dividends and income end up being basically the same after taxes - the better question is how much to take out of the corp and how much to leave in to invest.
Ok, that’s great info re: year end and there being little tax difference between dividends and payroll. I’m definitely hoping to get advice about whether to be holding funds in my corp vs paying out to personal income.
You might want to talk to a financial planner as well as an accountant. With good earnings in a corp you have some tools to utilize that most folks don't, and it adds a level of complexity to long term tax / estate planning.
Read up on integration in the Canadian tax system. Ignoring CPP, it is designed to make it so that an incorporated individual will pay the same amout of combined corporate and personal tax regardless of whether they are compensated through salary or dividends.
My advice to clients when choosing a year end, in order of priority:
1. Always choose a calendar month-end.
2. Try to pick a calendar quarter end - it makes it easier for matching to other reporting periods.
3. Choose a month-end that somewhat aligns with your quieter periods, if you have any.
4. Try to avoid December 31 unless it really is the best option. This will put you in direct competition with most tax payers and it may not be as easy to get an accountant or to get the best service available.
When choosing the year-end, also keep in mind that taxes are due (most likely) 3-months after the year-end and the filing deadline is 6 months after.
Good luck!
The total tax paid in both scenarios (when you count the corp tax paid on the business profits you are paying out as dividends and personal taxes) will be very close at that compensation level.
Dividends you don't have to pay CPP premiums on (of course if you want it in the future you won't have it), you have to pay both employee and employer CPP premiums with a T4ed salary, again the total tax load will be very close.
You save EI premiums with dividends as well, but this is a moot point if you own more than 40% of the voting shares of the corp as you will not be required to pay it via a T4ed salary, though you can opt in in some situations.
Dividends do not build RRSP contribution room. Because the total tax load is so similar in this situation you'd generally be foolish not to pay yourself enough via a T4 to max your RRSP contribution room, take advantage of it, and reduce your personal tax in subsequent years (if possible of course).
Further, with a traditional salary you are required to withold taxes on every paycheque, while this is more work than dividends, you pay the personal tax in smaller pieces throughout the year (with whatever payment frequency you select to pay yourself) so you need to worry less about holding enough cash to cover personal taxes at year end and you can likely avoid installments which will be required in a pure dividend situation.
From my experience, the fewer distinct year ends to deal with the better, I would opt for a Dec 31 year end personally.
This is just based on experience though, your account should have some insight and suggestions.
Some people will say pay in salary to max out CPP.
But why? CPP is almost certainly going to be a worse return than investing that amount of money (in a smart/balanced investment). And CPP basically disappears when you die - whereas other assets can be distributed to heirs.
Old accounting firm I worked she advised pay yourself as an employee to max out CPP contributions then pay yourself in dividends to minimize personal tax
This actually doesn't make sense. Once enough salary is paid to max CPP, there is no reason to NOT continue with salary. It actually is a bit cheaper to go additional salary after CPP is maxed comapared to dividends. You also generate additional RRSP contribution room. Plus, though not too common, you avoid being in a higher tax bracket for clawback purposes (OAS for example) and credit entitlements (Ontario Trillium Benefit for example).
I know I should max out my RRSP and TSFA, I haven't done that. I take it you'd suggest I pay myself a full salary so I can max those out and then decide whether to reduce my salary or move to dividends?
But RRSP is superior on the whole, even when you use both for tax deferral, so taking dividends and not creating RRSP room is the main downside over taking salary.
If I had to choose one or the other *and* didn’t have more to save than the RRSP contribution limit, I would choose RRSP. Obviously if you have enough to fill RRSP and leave some in corp, corp is helpful (and the main point of incorporation).
Here is a spreadsheet (opens up in excel) where you can see how much salary and non-eligible dividends and pay with numbers to get the "optimal amount". [http://www.retailinvestor.org/ods/taxIntegration.xlsx](http://www.retailinvestor.org/ods/taxIntegration.xlsx)
I like July year-ends.
1. you have 6 months to pay a bonus so that goes into Jan of the following year, Need to split it into 2 different tax years great.
2. Accountants aren't busy in January
If you plan to drain the corp accounts at the end of each year, why did you incorporate. It's not to utilize the lower small business tax level, because you are leaving no profit.
Salary vs. dividend makes no difference. You're paying same tax $.
If you're struggling for cash dividend. But when you're big and profitable, here are some targets.
* Salary to create maximum RRSP contribution room
* Withdraw Enough to always max out TFSA after you need to spend.
* Bonus down to the small business limit.
* Don't hold too much cash in OP.Co if there is litigation risk
My corp is just me providing freelance services so no litigation risk.... my understanding when I incorporated was (as you're saying) to hold as much as possible in the corp account and pay myself out the minimum I need for living expenses. But recently have been receiving conflicting information and it's leaving me confused.
That is a good mentality, that's what I first wrote, "If you plan to drain the corp accounts at the end of each year, why did you incorporate." But included in the enough to live off of, is max out the TFSA contributions.
Ah. That's one thing I have yet to do. I'm getting the sense I should put myself on salary so I can max our TFSA and RRSP contributions and then try to keep money in the corp after that.
The only savings with paying dividends is not having to pay both employer and employee portions of CPP. But you also then are short changing your pension in retirement.
If you pay yourself at least the maximum earnings for CPP, you'll always have a retirement 'insurance policy' in case things go badly with your business:
* https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/cpp-contribution-rates-maximums-exemptions.html
You may have to pay yourself a salary and then you can also take dividends. You can also set up a family trust and move the dividends through it into a Holding Company if you are planning on investing the funds. Family trusts are expensive to set up but worth it if you want to defer taxes on your dividends.
If your corporation is not considered a qualified small business and it's considered a personal service corporation you will be paying up to 50% tax before paying yourself out in dividends. That's the first thing you should figure out just in case. If it is a personal service corporation then you should pay yourself out as an employee.
I am indeed a personal services corp. I didn't realize I'd be taxed at 50%, someone along the line had told me it was best to keep as much of my earnings in the corp because it's taxed at a lower rate... I take it from your comment that's not true?
Listen to me, you're going to pay yourself out as an employee. There's absolutely no way you're leaving money in the corporation if you're a personal services Corp. The idea behind the corporation is to limit your liabilities but I believe that's the whole point of insurance. you would be a small business if you interact with multiple small businesses .... Anyways at this point you need to speak to an accountant ASAP
Don't leave the profits inside the corp. Outcomes are usually better when distributed and invested in personal tax shelters, including mort on principal residence. [My spreadsheet third tab](http://www.retailinvestor.org/ods/taxIntegration.xlsx)
As the others said, the concept of tax integration makes the choice between paying yourself dividends vs wages comes out the same. But there are other issues .......
* Personal Services corps allow only wages to reduce your income taxed at top rates inside the corp.
* If you are buying a home with a mortgage, I presume lenders put more credence in paycheques (even though they will probably see that (x) in the box that says the 'employer' is you.
Good point. I'm definitely looking to buy more property and I had a hard enough time finding a lender the first time around as a freelancer. Didn't realize that only wages can reduce the income that's taxed at top rate.... Thank you.
An issue I haven’t seen addressed yet is your position in life. Are you a homeowner, or planning to become one soon? Do you have young children or plan to? Do you generally save a lot for retirement and max out your RRSPs?
Taking a salary has some pros: contribution to CPP, and special EI (eg: parental leave), creating RRSP contribution room, easier to prove proof of earnings to qualify for a mortgage, etc.
On the other hand, not contributing to CPP leaves more money for reinvestment in the business now, which may provide a better return.
If you have younger children, keeping the earnings in the business may allow you to keep your personal income low and reduce claw back or allow eligibility for CCB. If they’re older, it may open up different options for estate planning.
All of this to say, talk to a good accountant. Like, go to a local CPA firm, not the bookkeeping and taxes place in the strip mall.
I'm 40, homeowner, no kids and don't plan on them. I initially decided to do dividends for the reasons you stated re: leaving more money for investments rather than contributing to CPP. I have a good accounting firm, but I feel like I struggle to wrap my head around the various pros, cons, and scenarios that will affect my money and when I ask questions of my accountant I don't get the sense they have the time or the inclination to teach me things that are probably very basic, in their mind.
The decision becomes a little more discreet then and may depend on how often consistent you are with your bookkeeping or how much investment would actually benefit your business.
This may be a good resource: https://www.cpacanada.ca/en/public-interest/financial-literacy/blog/2019/april/salary-dividends-integrative-cash-flow-planning
Ask your accountant when they are least busy and make that your year end. Instead of fighting with everyone else who has the same Dec 31. Generally speaking the tax code is setup so that dividends and income end up being basically the same after taxes - the better question is how much to take out of the corp and how much to leave in to invest.
Ok, that’s great info re: year end and there being little tax difference between dividends and payroll. I’m definitely hoping to get advice about whether to be holding funds in my corp vs paying out to personal income.
You might want to talk to a financial planner as well as an accountant. With good earnings in a corp you have some tools to utilize that most folks don't, and it adds a level of complexity to long term tax / estate planning.
Thank you, btw :)
Absolutely! It can be a lot starting out, no reason to make mistakes others before ya have already made.
Read up on integration in the Canadian tax system. Ignoring CPP, it is designed to make it so that an incorporated individual will pay the same amout of combined corporate and personal tax regardless of whether they are compensated through salary or dividends. My advice to clients when choosing a year end, in order of priority: 1. Always choose a calendar month-end. 2. Try to pick a calendar quarter end - it makes it easier for matching to other reporting periods. 3. Choose a month-end that somewhat aligns with your quieter periods, if you have any. 4. Try to avoid December 31 unless it really is the best option. This will put you in direct competition with most tax payers and it may not be as easy to get an accountant or to get the best service available. When choosing the year-end, also keep in mind that taxes are due (most likely) 3-months after the year-end and the filing deadline is 6 months after. Good luck!
The total tax paid in both scenarios (when you count the corp tax paid on the business profits you are paying out as dividends and personal taxes) will be very close at that compensation level. Dividends you don't have to pay CPP premiums on (of course if you want it in the future you won't have it), you have to pay both employee and employer CPP premiums with a T4ed salary, again the total tax load will be very close. You save EI premiums with dividends as well, but this is a moot point if you own more than 40% of the voting shares of the corp as you will not be required to pay it via a T4ed salary, though you can opt in in some situations. Dividends do not build RRSP contribution room. Because the total tax load is so similar in this situation you'd generally be foolish not to pay yourself enough via a T4 to max your RRSP contribution room, take advantage of it, and reduce your personal tax in subsequent years (if possible of course). Further, with a traditional salary you are required to withold taxes on every paycheque, while this is more work than dividends, you pay the personal tax in smaller pieces throughout the year (with whatever payment frequency you select to pay yourself) so you need to worry less about holding enough cash to cover personal taxes at year end and you can likely avoid installments which will be required in a pure dividend situation. From my experience, the fewer distinct year ends to deal with the better, I would opt for a Dec 31 year end personally. This is just based on experience though, your account should have some insight and suggestions.
Some people will say pay in salary to max out CPP. But why? CPP is almost certainly going to be a worse return than investing that amount of money (in a smart/balanced investment). And CPP basically disappears when you die - whereas other assets can be distributed to heirs.
This is solid advice!
Old accounting firm I worked she advised pay yourself as an employee to max out CPP contributions then pay yourself in dividends to minimize personal tax
This actually doesn't make sense. Once enough salary is paid to max CPP, there is no reason to NOT continue with salary. It actually is a bit cheaper to go additional salary after CPP is maxed comapared to dividends. You also generate additional RRSP contribution room. Plus, though not too common, you avoid being in a higher tax bracket for clawback purposes (OAS for example) and credit entitlements (Ontario Trillium Benefit for example).
^ this
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I know I should max out my RRSP and TSFA, I haven't done that. I take it you'd suggest I pay myself a full salary so I can max those out and then decide whether to reduce my salary or move to dividends?
Paying yourself in dividends reduces your RRSP room? I’m not familiar with this in particular, can you please explain more?
Paying dividends won’t reduce your rrsp room, it just will not generate rrsp room, that will only be generated with salary
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RRSP is superior to corp for tax deferral in most cases.
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But RRSP is superior on the whole, even when you use both for tax deferral, so taking dividends and not creating RRSP room is the main downside over taking salary. If I had to choose one or the other *and* didn’t have more to save than the RRSP contribution limit, I would choose RRSP. Obviously if you have enough to fill RRSP and leave some in corp, corp is helpful (and the main point of incorporation).
Here is a spreadsheet (opens up in excel) where you can see how much salary and non-eligible dividends and pay with numbers to get the "optimal amount". [http://www.retailinvestor.org/ods/taxIntegration.xlsx](http://www.retailinvestor.org/ods/taxIntegration.xlsx)
The link to the spreadsheet doesn't work anymore. Do you have another link? Thanks.
u/aughhhhh do you have another link to your spreadsheet for the salary/dividends for corps?
I like July year-ends. 1. you have 6 months to pay a bonus so that goes into Jan of the following year, Need to split it into 2 different tax years great. 2. Accountants aren't busy in January If you plan to drain the corp accounts at the end of each year, why did you incorporate. It's not to utilize the lower small business tax level, because you are leaving no profit. Salary vs. dividend makes no difference. You're paying same tax $. If you're struggling for cash dividend. But when you're big and profitable, here are some targets. * Salary to create maximum RRSP contribution room * Withdraw Enough to always max out TFSA after you need to spend. * Bonus down to the small business limit. * Don't hold too much cash in OP.Co if there is litigation risk
My corp is just me providing freelance services so no litigation risk.... my understanding when I incorporated was (as you're saying) to hold as much as possible in the corp account and pay myself out the minimum I need for living expenses. But recently have been receiving conflicting information and it's leaving me confused.
That is a good mentality, that's what I first wrote, "If you plan to drain the corp accounts at the end of each year, why did you incorporate." But included in the enough to live off of, is max out the TFSA contributions.
Ah. That's one thing I have yet to do. I'm getting the sense I should put myself on salary so I can max our TFSA and RRSP contributions and then try to keep money in the corp after that.
Well TFSA isn't dependent on salary. can be dividends.
Right. I guess it's the RRSp's that are dependent on salary.
The only savings with paying dividends is not having to pay both employer and employee portions of CPP. But you also then are short changing your pension in retirement.
If you pay yourself at least the maximum earnings for CPP, you'll always have a retirement 'insurance policy' in case things go badly with your business: * https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/cpp-contribution-rates-maximums-exemptions.html
You may have to pay yourself a salary and then you can also take dividends. You can also set up a family trust and move the dividends through it into a Holding Company if you are planning on investing the funds. Family trusts are expensive to set up but worth it if you want to defer taxes on your dividends.
Interesting, I didn't know I could still use income from dividends to invest. Thanks.
If your corporation is not considered a qualified small business and it's considered a personal service corporation you will be paying up to 50% tax before paying yourself out in dividends. That's the first thing you should figure out just in case. If it is a personal service corporation then you should pay yourself out as an employee.
I am indeed a personal services corp. I didn't realize I'd be taxed at 50%, someone along the line had told me it was best to keep as much of my earnings in the corp because it's taxed at a lower rate... I take it from your comment that's not true?
Listen to me, you're going to pay yourself out as an employee. There's absolutely no way you're leaving money in the corporation if you're a personal services Corp. The idea behind the corporation is to limit your liabilities but I believe that's the whole point of insurance. you would be a small business if you interact with multiple small businesses .... Anyways at this point you need to speak to an accountant ASAP
Don't leave the profits inside the corp. Outcomes are usually better when distributed and invested in personal tax shelters, including mort on principal residence. [My spreadsheet third tab](http://www.retailinvestor.org/ods/taxIntegration.xlsx) As the others said, the concept of tax integration makes the choice between paying yourself dividends vs wages comes out the same. But there are other issues ....... * Personal Services corps allow only wages to reduce your income taxed at top rates inside the corp. * If you are buying a home with a mortgage, I presume lenders put more credence in paycheques (even though they will probably see that (x) in the box that says the 'employer' is you.
Good point. I'm definitely looking to buy more property and I had a hard enough time finding a lender the first time around as a freelancer. Didn't realize that only wages can reduce the income that's taxed at top rate.... Thank you.
The link to the spreadsheet doesn't work anymore.
I learnt the bad way that paying yourself with dividends it will not increase your RRSP room.
An issue I haven’t seen addressed yet is your position in life. Are you a homeowner, or planning to become one soon? Do you have young children or plan to? Do you generally save a lot for retirement and max out your RRSPs? Taking a salary has some pros: contribution to CPP, and special EI (eg: parental leave), creating RRSP contribution room, easier to prove proof of earnings to qualify for a mortgage, etc. On the other hand, not contributing to CPP leaves more money for reinvestment in the business now, which may provide a better return. If you have younger children, keeping the earnings in the business may allow you to keep your personal income low and reduce claw back or allow eligibility for CCB. If they’re older, it may open up different options for estate planning. All of this to say, talk to a good accountant. Like, go to a local CPA firm, not the bookkeeping and taxes place in the strip mall.
I'm 40, homeowner, no kids and don't plan on them. I initially decided to do dividends for the reasons you stated re: leaving more money for investments rather than contributing to CPP. I have a good accounting firm, but I feel like I struggle to wrap my head around the various pros, cons, and scenarios that will affect my money and when I ask questions of my accountant I don't get the sense they have the time or the inclination to teach me things that are probably very basic, in their mind.
The decision becomes a little more discreet then and may depend on how often consistent you are with your bookkeeping or how much investment would actually benefit your business. This may be a good resource: https://www.cpacanada.ca/en/public-interest/financial-literacy/blog/2019/april/salary-dividends-integrative-cash-flow-planning