This blog will discuss some of the typical decision making processes that you should consider when discussing with your accountant the most efficient form of receiving income from your company. Each situation will, of course be unique, and even the same individual may have different objectives from year to year which require careful consideration.
1) What is your cash requirement for your day to day living expenses? This will establish your minimum requirement from your company each year. It may be useful to establish a regular salary for the business owner to achieve this level and to make regular payroll remittances to CRA. This has the benefit of ensuring you are generating contribution room for your RRSP, accruing CPP credits towards your retirement, and evening out your cash flows which can be useful for budgeting purposes.
2) Consider paying your spouse. CRA will accept salary payments to family members that are reasonable, related to market rates and tied to actual services being delivered to the company. An employment contract can be useful in documenting these relationships and establishing the services being provided and related compensation. If documented carefully this can be an effective planning technique to split income with a lower income spouse or child.
3) Surplus cash in the company may be retained in the company and invested, paid as a dividend to the shareholders or claimed as a bonus by the shareholder/owner.
4) Dividends are a flexible way to pay out excess cash, keeping in mind they are generated from after-tax funds in the company, so some tax will already have been paid by the company. If your spouse and family members are also shareholders in your company, or you have a family trust holding shares for their benefit, dividends can be “sprinkled” to them to take full advantage of their lower tax brackets.
5) If you don’t need the excess cash consider investing it in the company or establishing a holding company to pay the extra cash to as a dividend. Investing within the company can generate an ongoing deferral of tax until the money is withdrawn although it will be necessary to pay out adequate dividend each to recapture the refundable tax that the company will have to pay on its investment income.