We all work hard for
our money and at the end of the day nobody wants to over-pay the Tax Man
and be left with less than what would normally be required. For this
reason the remuneration of the owner-manger is always a hot-button
topic sure to perk the ears of the entrepreneur who has made money in
his company and who is now looking to receive something in return for
his labor, management and invested funds.
Should he take a
salary or dividend? By foregoing a salary and categorizing himself
solely as a shareholder, are any benefits lost? Should he be paying his
kids? While each owner-managers' situation is unique, in most cases
when planning remuneration the following should be considered:
optimal salary and dividend mix
The reduction of corporate tax rates over the last few years has
resulted in the tax preference of
dividends over salary. In
British Colombia the tax savings of dividends over salary is 1%
while in Alberta and Saskatchewan the tax savings of dividends over
salary is 2.7%.
While dividends have tax appeal, the payment of a salary to an
owner-manager yields three distinct benefits:
(i) It creates earned
income which qualifies for RRSP deduction room in the subsequent year.
(ii) It identifies
the owner-manager as an employee within his business which enables him
to participate in employee allowances, home or relocation loans,
employee gifts and the private health services plan.
results in the payment of Canada Pension Plan (CPP) contributions. To
qualify for the CPP disability or death benefit you must make annual CPP
contributions for at least four of the last six years. Any salary over
$3,500 will trigger CPP contributions at the rate of 10%. For example
an annual salary of $4,300 will trigger $80 in CPP contributions. An
$80 per year premium will provide disability coverage of approximately
$400 per month.
Consider paying a
tax-free dividend from your capital dividend account
The capital dividend
account is essentially a running total of the non-taxable portions of
capital gains and losses. Any time there is a balance in this account,
dividends should be paid since they can be received tax-free. When
paying these dividends, a prescribed form T2054 must be filed with the
Canada Revenue Agency. There are penalties for late filings and for
filing excessive amounts.
down your shareholder debt
loan credit balance can be thought of as your own personal bank
account within your company. If you are fortunate to
have a shareholder loan credit balance then you can withdraw these
funds from your company tax-free. For farmers, particularly those
who incorporated their partnership interests they can receive
minimal salaries from their companies while they live off their
shareholder loan account balances.
Depending on the
attributes of the shares, a redemption can be either a tax-free
return of initial investment or a dividend subject to tax. For
farmers who have land outside of their companies and who are
contemplating its sale, they should check their cumulative net
investment loss (CNIL). If you have accumulated more expenses
from investments then income, you will have a CNIL balance.
Any CNIL balance will reduce your ability to claim a full capital
gains exemption on the sale of your farmland. To eliminate this CNIL
balance it is common practice to issue dividends or redeem shares
corporation receives investment income it must pay an additional
refundable corporate tax. To be refunded this tax, the
corporation must issue dividends.
If your wife or
children help with your business then you should consider income
In order for this
deduction to be valid, you should:
them a cheque
that their salaries are reasonable and reported on their respective
If you have a
corporation and you are re-thinking your own remuneration then you
should follow-up with your accountant. Plan to pay less tax!
Now that's conversation worth having!
Allyn Tastad, certified general accountant, is a
partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at
306-653-5100, e-mail at
firstname.lastname@example.org or website
www.hth-accountants.ca. He is
also involved in the family farm near Loreburn, Saskatchewan. The
opinions expressed in this column are for information only.