How to Pay Yourself from a Corporation in Canada | Salary vs Dividends

hi i'm joe from avalon accounting today i'd like to talk to you about one of the biggest questions we get from small business owners and that's what's the best way to pay myself for my corporation [Music] to start and this is one of the biggest pieces of information you're gonna get from this video is that there's only two ways to pay yourself from your corporation and that's salary or dividends no matter what you hear about innovative fancy workarounds on the internet there are only two ways to pay yourself from your corporation okay first up should you pay yourself a salary if you've ever had a job a salary is going to be pretty familiar to you what we want to cover today is what it means for you as a business owner and how it might be beneficial for you all right so the number one benefit of paying yourself a salary is you get steady predictable income throughout the year there are other benefits as well so number one other benefit would be that when it comes to tax time you don't have a huge tax bill to pay you have paid your taxes throughout the year and might even get into a refund situation another big benefit of paying yourself a salary is that you create rrsp room and this helps you shelter some of that income from taxes and save for your retirement speaking of retirement cpp is another big component of paying yourself a salary so when you pay yourself a salary you're also contributing to cpp and you get that cpp benefit for when you retire lastly a big benefit to paying yourself a salary and that steady predictable income that i mentioned before is that banks really like this type of income if you're going to get a mortgage or a loan so paying yourself a salary at least some shows that steady predictable income and allows you to borrow better as a business owner here's what's really critical to know about paying yourself a salary you will need to register yourself for a payroll account with cra this allows you to deduct income tax and cpp at source and remit those to the government each month now this is a big one so listen up cra is relentless when it comes to wanting their income taxes at source their remittances to be remitted every single month and the penalties are stiff so make sure you have a system in place or somebody to keep you accountable to pay those each month another consideration is that you need to file a t4 every year now if you have other employees it's not going to be a big deal because you're already filing and you just add your t4 onto theirs now here's a couple cost considerations for you number one is cpp if you're paying yourself a salary you're going to have to pay into cpp and that's your portion plus the company's portion so that's up to five thousand dollars a year that you need to pay into cpp and depending on your philosophy whether that's a savings or a tax this can be an extra cost to you now and lastly another consideration is that you get a deduction for the salary that you pay yourself within your corporation which reduces your income and reduces your corporate tax now this gets put onto your personal tax and you pay your income tax there all right so there you go that's what you need to know about paying yourself a salary and we're going to move on to dividends next all right so paying yourself a dividend is a simple way of getting money out of your corporation and to you personally there's lower costs involved in paying yourself a dividend and one of the big ones is that cpp i talked about earlier you'll save that five thousand dollars a year by not paying into cpp but you'll also not create rrsp rooms so you don't have the tax shelter of rrsp and saving for your retirement if you're paying yourself dividends which you would get with salary next it's much simpler to pay yourself a dividend you p if you're a hundred percent owner of your company you can pay yourself directly from your corporation to you personally and have a t5 filing at your end that's one filing and you don't have to worry about the administrative part of deducting income taxes at source remitting every month and having a payroll account now that all sounds great but one of the big downsides is you're also not paying income tax every month so when it comes tax time you might have a very large tax bill that you may or may not have saved for so knowing yourself is really important when you're paying yourself dividends are you the type of person that will put money aside every month and every time that you pay yourself a dividend so that you're ready for tax time or do you need more forced savings on that tax by paying yourself a salary and having income tax deducted at source a couple last considerations if you're going to pay yourself a dividend so number one is that it's not a deduction from your corporate income so you pay tax at the corporate level even though you've paid yourself a dividend and lastly you'll want to consider your own borrowing needs so if you're up for a mortgage or you're looking to buy a house over the next period of time dividends are likely not going to be the optimal type of income for you banks are still going to want to see that consistent income and salary is the way to go if that's the case so i've covered some basic examples so far but you're probably having some questions swirling around in your head about how your specific situation is a little bit different stay tuned because i'm going to cover avalon situation and how we pay ourselves a combination of salary and dividends and our share structure to make that happen so the ultimate question that we get is which one is going to make me pay less tax and this is a challenging question to answer because there's really minimal savings in tax on either side salary or dividends i mentioned before about the cpp savings so that's a 5 000 ish savings that you'll get if you're not paying yourself salary and you stick to dividends strictly okay so there's minimal tax savings between paying yourself a salary and paying yourself dividends and this is by design now i'm going to get a little bit nerdy on you but the canadian tax system is a beautiful thing it's based on a concept called integration and what you need to know about that is that this has already been contemplated in the canadian tax system what they're looking for is that someone getting paid a salary an employee of a company and an owner of a company should pay the same amount of tax on the company side the dividend payment it's taxed a little bit at the corporate level and then the rest is taxed at the personal level and overall you pay about the same amount of tax now there's small differences by province by province and year by year based on tax rates and there are minimal savings to be had on one side of the other but typically aren't enough for us to really go down that path the other considerations that i mentioned before are much more impactful to whether you pay yourself a salary or dividends here's how we pay ourselves at avalon so if you're unfamiliar with avalon we have two business owners paul and myself and we have run a corporation called avalon accounting inc we are the 50 50 owners of that and our share structure is class a's which are voting non-participating shares meaning we can't pay ourselves any dividends to those shares we have class b's and class c's and those class b's and c's are 100 owned by paul b's 100 owned by joe sees and those are participating non-voting shares which means they can receive dividends so the advantage of a share structure like this is that yes we have our a's which are voting on our control but we can also differentiate our dividends by owner so how we pay ourselves is that we pay ourselves a salary for the work that we do within the company that's us acting like employees attending meetings having client meetings doing the work so we pay ourselves as employees through salary that gives us steady income we pay our income taxes on that every single month and never see it in our paycheck and we're ready to go at tax time when it comes to our salary portion we also pay ourselves dividends when we have profit to share amongst our owners that we don't want to reinvest within the company so paying ourselves a dividend really is based on the ownership and the profit that we've created within the company this is great because we can transfer that almost as a bonus for our ownership of the company once every few months and we put some money aside to make sure that we have our tax bill set away when it comes to tax time so this setup of paying ourselves a little bit of salary and a little bit of dividends works really well for us some other considerations for you might be your stage of business so if you're new and you don't have the resources to have a payroll system set up and you don't want the administrative costs with that maybe for your first year you just pay yourself dividends so that might work in that scenario in another scenario you may be saving for your your home and you want to be able to qualify for a mortgage maybe you go more towards salary and pay yourself all salary for a number of years to establish that income lastly maybe you have a really growing business and you're seeing lots of profit but you want to reinvest that money back into hiring more people and buying more equipment you won't want to be paying yourself a dividend in that scenario what you want to be doing is accumulating that cash to reinvest back into your business we work with all kinds of entrepreneurs in different situations and the salary versus dividend question is really based on their unique circumstances so that can be lifestyle goals business goals profit share structure you name it we take into account everything when we speak with these entrepreneurs about paying themselves salary versus dividends so there you go there's the pluses and minuses of paying yourself a salary versus dividends i hope i've addressed your specific circumstance but if i haven't please post in the comments below i'll do my best to answer all the questions that i can get to until next time get out there and build that thriving business we're really excited to see what you can create [Music] you

Channel: Avalon Accounting

Views: 101,654

Keywords: canadiantax, canadatax, canadabusiness, canadiansmallbusiness

Id: pfkQhGsQ8eg

Length: 10min 22sec (622 seconds)

Published: Mon Jul 13 2020