How to pay yourself from your company?

Mohammad Hossain, CPA, CGA

You are the only shareholder and you work for your company. Your company receives revenue from another company because you provide services to them. A good example is, you are a web-site developer who developed a website for Tundra Corp (suppose) and invoiced them $3,000. Tundra Corp. did not pay $3,000 to yourself, instead paid out to your company’s name. So, the earnings in exchange for your time have been parked in your company. However, you need money for your living. Now the question arises, how would you pay yourself from your company? Because there are various options to pay yourself from your company you better know all the options to find a best fit for yourself.

We will discuss various ways of paying yourself from your corporation. You can choose either of the following or a combination.

Option 1: Lump-Sum Payment
Based on your earnings and your personal need, you can set a lump-sum amount, for example, $5,000 per month, and withdraw from your business (transfer from your business bank account to your personal account). At the end of the year, report the total amount (for example, $60,000) to Canada Revenue Agency (CRA). This reporting is done using a T4A slip. Your accountant will be able to help you with this. You need an RP program account under your CRA business account.

Benefits

• This amount is considered as a business expense and this will reduce the tax liability of the company.
• This system is very simple and less costly to run.
• On a personal level, you are eligible to contribute to your CPP.
• Flexible in nature.

Option 2: Payroll
You may set an amount for yourself as salary on an annual basis (suppose, $62,400). You will pay yourself systematically under a payroll system. There are various types of frequency of payment you can choose from, like weekly payment, bi-weekly payment (most popular), semi-monthly payment (twice a month) and monthly payment. For an annual salary of $62,400 following will be the payroll payments.

When you choose a payroll system, you have to collect CPP for both employee and employer’s portion and income tax in advance from the gross pay and then remit this total amount to CRA by 15th of every month for the prior month’s total payroll. If you hire an employee, you have to deduct employment insurance (EI)  from the employee’s gross pay, and contribute employer’s EI contribution on the gross pay. CPP, EI and withholding income tax can be calculated by various paid payroll software, or you can use CRA’s online payroll calculator (you will find the link of this payroll calculator under the “Link” section of our website). At the end of the calendar year, you have to summarize all the numbers and prepare a T4 slip for yourself and then you have to report the T4 Summary Return to CRA by the end of February of next year. To run a payroll system is not easy so it is recommended to hire an accountant. To run a payroll system is costlier than Option 1. You need an RP program account under your CRA business account.

Benefits

• The salary can be claimed as a company expense and this will reduce the tax liability of the company.
• On a personal level, you are eligible to contribute to your CPP.
• This salary is considered as your employment income, thus your RRSP limit increases. You can use this RRSP limit to get tax advantage in your personal tax return.

Option 3: Dividend
Suppose depending on the business performance, you paid yourself from your company $5,000 in March, $20,000 in June, $30,000 in September and $15,000 in December. Instead of considering this $70,000 as Option 1 (management salary), you rather considered it as a dividend from your company. In this case, you do not need to calculate and remit CPP or withholding income tax to CRA. However, you need to prepare a T5 slip which will report total dividend payment (in this example, $70,000), grossed-up amount and dividend tax credit, and then you have to file a T5 Summary return to CRA. Your accountant can help you with this.

Dividend is not considered as an expense for the company. So, there is no tax advantage at corporate level. However, the dividend tax credit might help you reduce your personal tax depending on your total income. Your accountant may help you in such tax planning. On a personal level, dividend income is not considered as employment income; thus, does not create CPP saving opportunity and RRSP limit. You need to open an RZ program account under your CRA business account.

Benefits
Flexible in nature.

Tax Planning
You can use either of these options or all together to get the best tax advantage. You need tax planning to get the best out of these options and minimize your overall tax liabilities. Your accountant will be able to help in your tax planning.