As we see with out clients, many owner operators transact with their businesses and themselves for instances such as loaning funds to the company, paying for company expenses personally, withdrawing funds from the company, etc. A lot of times, our clients are not aware that there may be some implications of these transactions from an accounting and tax perspective.
Generally, funds can be taken out of the business by a shareholder either as a dividend, salary or loan repayment (if they have contributed funds into the company). Generally, the shareholder should review the loan balance first and assess whether they should draw down on their loan firstly before they determine their dividend amount.
At MP group we assist our small business clients with this assessment by reviewing all the funds contributed into the company and expenses paid personally on behalf of the company to determine the due to shareholder balance. After repaying the loan balance, it would make sense then to claim a dividend as you can withdraw the funds for a loan repayment tax free. We like to recommend dividends for our small business clients as they do not have to worry about the administrative hassle of remitting CPP, EI and withholding taxes pertaining to salary. Also, generally, you are at a tax advantage with dividends up to a certain amount if dividends are your only source of income also.
At MP Group we help our clients determine the appropriate mix of Salary or Dividends. Sometimes, it makes sense to take a salary to bring your taxable income down to the small business limit of $500K. At times, it makes sense to stick with dividends only. It can vary based on the business and shareholder's financial situation.
The shareholder may take a loan from the company also, but there are some tax rules that they need to be aware of before they take a loan from the company. If there is a shareholder receivable on the balance sheet for more than a year, it raises some red flags. Generally, the loan to the shareholder should be repaid within one year from the taxation year the loan was taken before the amount would be deemed a dividend.
For more information on the topics noted above and interested in whether MP Group can help you, feel free to contact us.