Salary or Dividend for the Owner
Are you considering taking funds out of the company? As an owner, your company is a separate legal
entity from you. There are generally
three ways in which you can withdraw money from the company.
In the instance you may have loaned funds to the company
either by paying for expenses on behalf of the company or providing an initial
loan to the company during the start up stage, as a shareholder, you can
withdraw money from the company as a settlement of the loan. This would be a transaction in account of
capital (i.e. loan repayment); therefore, a shareholder will not be taxed on
this repayment.
The second way that a shareholder can withdraw funds from
the company is through salary. The
benefit of paying a salary is that you can deduct the salary in the business
which will result in lower corporate taxes.
Also, if you value the Canada Pension Plan (CPP), you may find taking salary
valuable since it is a requirement to contribute to CPP and EI. Now this can be the downside of taking
salary as a portion of the pay is remitted to the Receiver General for CPP, EI
and withholding taxes and you net after tax cash intake is less. Also, it can be an administrative hassle to
set up a payroll account with the CRA and determine how much to remit on the 15th
of the following month.
Lastly, the final way to be compensated from the corporation
is to declare a dividend. The benefit of
dividends is that it is less of an administrative pain. Simply issues a cheque and note down “dividends”
in the memo and update the corporate minute book. Also, $35,000 of dividends paid to the
shareholder will be free from personal tax based on the concept of integration. Through the use of dividends and if shares are issued to your spouse, there are some tax splitting opportunities.
For more information on the topic please contact an MP Group
expert.