How do I pay myself as a business owner?

It's the question that all incorporated business owners ask; how should you pay yourself as a Canadian business owner? It's best to consider the pros and cons of the two most common ways to pay yourself as a Canadian business owner - salary or dividends if incorporated. 

Determine how much revenue is coming into your business - and how many expenses you have to cater for. Taking out too much for yourself when your company's revenue is on the low could mean that you will be short on running cost and keeping your business going may become a problem in the long run. You might also think it's in your business's best interest to lower your wages, but it's also essential not to under pay yourself. A critical look into your business profits can help you determine how and what to pay yourself as a Canadian business owner. Also keep in mind that the money the corporation makes belongs to the company and not you! You cannot simply just take funds out the bank account to purchase personal items such as beer, groceries etc.

Paying attention to how long your business has been around is also an essential factor.

If you are a startup, you might make less profit if your company has only been around for three years. Alternatively, some companies can thrive incredibly within a few years of startup.

When it’s your business, you will want to make sure that everything covered of course this means you have to work countless hours more than your employees.

Remember to consider this, pay yourself accordingly, as you would if you were an employee putting in those extra hours. Research what others in your field of business are doing and decisions they are making and decide based on that. DON'T JUST TAKE MONEY OUT OF THE BANK ACCOUNT AT WILL! It is not your money, it belongs to the company!

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In the end, understanding your business type, profit, how long your business has been running and the value you are adding to your business is a good place to start mapping out what to pay yourself as a business owner.

Now the tricky part.

What to pick! Deciding on receiving a salary, dividends, or a mix of both, is an important decision when organizing your personal compensation as a business owner. Being paid in salary and dividends both have pros and cons; however, the decision should be made based on your business and personal goals. It should also be noted that many business owners opt for a mix of both.

understandable that every small business owner in Canada wants to know the most tax-efficient method of extracting profit from their own companies.

Paying yourself a business salary or wages as registered corporation means that you will have a set, recurring and steady personal income taxed by the Province you live in and federal government rates. Paying yourself a dividends does have benefits of their own. Again cannot stress Do Not Just Take Funds or Spend money from your corporate bank account at will. It does not belong to you!

‍If you are thinking about having a retirement plan, you should consider paying yourself a business salary. Paying yourself a business salary means that you will be eligible for the Canada Pension Plan (CPP). With CPP contributions, you can receive pension or retirement benefits as early as age 60. And also you can contribute to a RRSP plan as an employee of the company.

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Consider this by becoming an employee this could also mean less personal income due to you having to pay both CPP contributions at a cost to you, and your cooperation. Yes that’s correct you will have to pay double. There will be more cash to compensate for all your year's contributions in the long run. If you paid yourself nothing but dividends when you turn 60, you wont be able to apply for your Canada pension as you did not pay into CPP. On the other hand, if you draw a dividend you can open a Tax Free Saving account and place money into that account and let it build for your retirement. I highly recommend doing this!

RRSP Benefits with a salary.

‍Salaries and wages are eligible income for RRSP - Deductible Registered Retirement Savings Plan. Additionally, your tax can be reduced by (RRSP) contributions as any income you earn in the RRSP is generally absolved from tax as long as the funds are kept in the plan. This is used on your personal T1 to reduce taxes, for now. But later you will have to pay tax on the RRSP draws you cash out and as you know the government is always putting the tax rates Up, never down.

Another benefit for some people who may want to purchase property, a home.

‍Paying yourself a business salary may favor you when you are attempting to qualify for a mortgage. Banks like to see an inflow of steady and predictable income, and a salary or wage can help you achieve that. When a small corporate business applies for a credit or loan, the salary would be a better proof of income than dividends. Therefore, besides paying yourself alone, you can also choose to pay salaries to related employees such as spouses, children, or other family members. hint hint

Other things to consider being on salary

By choosing to pay yourself a salary, your cooperation must open an account with the Canada Revenue Agency (CRA) and file the paperwork which usually comes with a lot of stress on its own. The corporation will need to hold back source deductions (CPP and Income Tax) each time you are paid. This usually incurs an additional administrative cost. The cooperation must also prepare and file a T4 for any employee that earned wages each year when running employee payroll. This is an added cost as you will need a professional bookkeeper who knows how to do this for you. And once again, CPP contribution and other forms of retirement plan would mean that you are expected to pay double as the employer and employee and may have to pay extra taxes to the government. In short, the biggest downside of a salary are the benefit contributions and tax challenges. But, having a steady income is seen as a good thing by the big financial institutions should you wish to make investments, or take out a bank loan.

Now let’s talk about DIVIDEND's.

What the heck is a dividend and how does it apply to you in getting paid a wage?

First, Dividends are simple, and can save you money on taxes. Yes, that’s right I said SAVE.

This may get a bit complicated to you, but this is were a professional Accounting Technician like me (George Nylan) comes in and gets this all done for you to Save you money on taxes.

You are a shareholder in your incorporated company. You could hold all the shares 100%. Dividends can be declared at any time with cash being transferred from the corporation's account into a shareholder's account (bookkeeper talk) in as many transactions as required. This all goes onto a balance sheet in your books and balanced between your equity/worth, and cash out of your corporate bank account into your personal chequing account. Simply your pay which can be taken bi-weekly, monthly etc.

So, what are the benefits of paying yourself a dividend as a small business owner who has set up their business as a corporation in Canada? I am glad you asked.

Taxes are simpler.

Dividends often come with a dividend tax credit, making it carry less personal tax liability than business salaries or wages. They don't reduce the corporate tax paid as they are not a corporate expense but are a more straightforward and easier to implement payment option for small business owners in Canada. Again, more bookkeeping and tax talk. Simply, you pay a less tax on your personal tax return for these wages as you get a credit.

Fewer chances of payroll penalties. 

When paying yourself dividends, the only thing you need to worry about is completing and filing your T5s on time once every year which is prepared by a bookkeeper and issued to you to use on your T1 Personal tax return.

Easy to navigate.

By choosing to pay yourself dividends, you do not go through the stress of registering for payrolls and remitting (double) deductions and higher taxes based on your rate of personal income. 

You can easily declare a dividend and transfer money from the corporation's account into your personal account if you own 100% of your cooperation which most do.

Lower cost.

In contrast to business salaries where you make contributions to CPP, have low income now, and spend later, a dividend is a direct opposite. By paying yourself dividends, you do not need to contribute to CPP, which means that there will be a reduction in corporate and personal cost and less administrative cost.

Is there anything else to consider by paying yourself in dividends? Good question.

Paying yourself through dividends will make you ineligible to make contributions to retirement plans. RRSP contribution room is not created because a dividend is not counted as "earned income."

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Claiming other personal tax deductions for expenses may be impossible. For instance, child care expenses can be used to deduct salary, but not dividends and your spouse should claim these.

With dividends as a payment plan for your small business in Canada, shareholders will have to contribute independently to prepare for retirement as dividends are not CPP eligible. Which in my personal opinion would be better anyway such as a Tax-Free Savings account. And remember if you have a spouse, they can be an employee of the company and able to purchase freely any RRSPs and also have a CPP retirement plan.

Salary or dividends, how should you pay yourself as a business owner in Canada?

Ultimately, when it comes to making this decision, the choice is yours and should be based on your personal choices, your company structure, and your goals. However, it is common that large corporations with wealthy income business owners will pay themselves a mix of a reasonable salary, with dividends options to get the best of both worlds. Connecting with a trusted financial advisor is the best way to go. But if you just starting out with a low to moderate income then dividends should be a good way to pay yourself.

How much should you pay yourself as a business owner?

This question brings into account how much revenue is coming in, verses expenditures going out of your company? You really do not want to be bleeding your company dry if it is not making enough money to keep going on its own and you find you have to borrow money to start paying company expenses and yourself. This will end your dream and become disastrous. You along with your accountant will need to sit down and go over your monthly financial statements to see if you are making any money or not. Hopefully you are and the company are running profitably each month. Sometimes it takes time to build a profitable company and that is something to consider when running a company.

All my best to you and your dream, may it become successful.

If you have any further questions, please do not hesitate to contact me. George Nylan 780-656-0551

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