REMUNERATING THE OWNER-MANAGER

Originally published on June 26, 2006

 

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:

  1. Determine your 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.

    (iii) It 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.
     

  2. 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.
     

 

  1. Consider paying down your shareholder debt

    Your shareholder 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.
     

  2. Redeeming shares

    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
     

  3. Refundable dividend tax

    Whenever a corporation receives investment income it must pay an additional refundable corporate tax.  To be refunded this tax, the corporation must issue dividends.
     

  4. Income splitting

    If your wife or children help with your business then you should consider income splitting.

    In order for this deduction to be valid, you should:

    (i)     write them a cheque

    (ii)   record their hours

    (iii) ensure that their salaries are reasonable and reported on their respective tax returns

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 allyn@hth-accountants.ca 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.