Remuneration for Owner Managers
About the Author: Wilson Wong PC, are Chartered Accountants in Calgary providing tax and accounting services to small and medium sized businesses and high networth individuals.
Chartered Accountants are asked this almost everyday "How do I pay myself if I am the owner of my company"? The truth is this article is only a starting point, and this question is answered differently for each owner.
In short there are two ways; it's either salary or dividends. There is a third way which I’ll explain why I don’t like it. There is a forth way which is basically off the table now.
Dividends are by definition the distribution of profits from the company. It is considered an investment income to you personally. Essentially it is the company who worked (or conducted business) and thus the Corporation pays corporate taxes on that amount. Subsequently you pay the dividends out to yourself and you in turn pay some taxes personally in addition to the corporate taxes. The Corporation pays 14% of taxes here in Alberta (13.5% - BC) and you pay 27.71% at the highest personal dividend tax rate (33.71% - BC).
Salaries are an expense to The Corporation. The owner manager is an employee of the company and while the company is earning business income it offsets this income with your salary. Therefore the tax burden is zero for the Corporation on the amounts you paid yourself, and you would be taxed at 39% at the highest tax rate personally in Alberta (43.7% - BC). The caveat to Salary is you will also pay for CPP. I won’t get into the technical side of CPP, instead think of it as on top of the 39% tax you will end up paying another 9.9% tax on the first $52,000 of salaries. You also have to make monthly payroll tax remittances which can be a cumbersome activity if you did not have guidance.
As you can see, whether you pay yourself dividends or salaries, in theory it should work out to be around the same range of taxes paid in a combination of corporate or personal taxes. So the biggest difference becomes really a question of how you want to retire, and rather not how you want to pay yourself. Most owner managers don't realize this, that the question on how to pay yourself is ultimately tied to your retirement. I will get into this further later in this article.
Your accountant may also recommend the management fee approach. I don’t like this approach because what this effective means is you, the owner manager, is a sole proprietorship that invoices the Corporation for your services. Therefore, the Corporation is a business and you as a person are also a business. You still pay CPP on management fee but you don’t have to do payroll remittances monthly, you pay all your taxes in April the next year one time. Two issues come to fruition on this one. If you were a business by yourself then you would also charge your corporation GST for the remuneration you take from the corporation. At the end of the year when you try to figure out how much you've taken out, you've likely not charged your corporation GST and unfortunately GST becomes assessed as an additional 5% tax on top of your normal taxes. The second issue is you're probably not a business as a person. After all, how can you and the corporation separately and jointly be independent businesses? Iif CRA assesses you as such, they will make your corporation liable for the payroll remittances and at this point you're considered late, so there would be interest and penalties on the amounts you pulled from the company. This is why I don't like the management fee approach.
The forth option is known as the Employee Profit Sharing Plan - EPSP. This was a great thing while it lasted. If you've checked out our other articles you'll know why this is off the table now - Changes to EPSP.
So is it salaries or dividends? The short answer to that is a little bit of both. Here's what happens if you paid yourself a little bit of both your entire working life, at age 65:
- You've been contributing your excess salaries to your RRSP so this is now a source of retirement income to you.
- You've been contributing to CPP for 30 some years now so you've maxed out your CPP and are entitled to receive today's maximum benefits of $10,000 a year.
- You've built up a sizeable portfolio inside your corporation so you're going to slowly pay yourself these amounts over the next couple decades.
- You're making less than $67,000 so you are also entitled to receive another $6,800 a year in Old Age Security pension from the Government of Canada.
If you paid yourself dividends, you won't have the ability to contribute into an RRSP. If you paid dividends you would not have contributed to your CPP so that's off the table as a source of retirement as well. Half your retirement plan is gone. The best thing to do is to sit down for a few minutes with your accountant and figure out the optimal amount of dividends and salaries you want to take. It's different for everybody. Here are some questions to bring to your accountant that will effect how they determine your salary or dividend mix:
- Do you have kids? How many, and what are their ages?
- Are your married? Is the spouse a shareholder? Are your sure?
- How many years do you plan to work from now until retirement?
- What did you do before you were self employed?
- Have you completed all your major life asset purchases or not quite done?
As you can see it's a very complicated question and you need professional guidance to get through it all.
-Wilson Wong, Chartered Accountant