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E-Myth – “Why most small businesses don’t work & what to do about it”

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Edmonton Bookkeeper | Tax Planning Through Dividends

When business owners are unsure of how to pay themselves salary and dividends in their corporation says Edmonton bookkeeper, they can run into significant problems either by paying unnecessary personal tax, or even triggering huge tax payments from CRA simply because of what is in their shareholders loan account. This is owners should be very aware of how to pay themselves and their corporation and use shareholder loan accounts, or risk paying the price.

When business owners take any money out of their corporation, it is added to their shareholder loan account. This is true mother the reason why business owner takes money out of their account. Either through salary or dividends. All the money that they take out, they are expected to pay back says Edmonton bookkeeper. However business owners are not planning on paying that money back, because that is the money that they took of the corporation in order to live off of, so business owners should understand that if they are not planning on paying that amount back, they need to clear their shareholders loan balance. Which requires them calculating all the money that they have paid themselves through the course of the year, and declaring that on their personal taxes. Once they have paid their personal taxes, then this clears their shareholder loan balance.

If business owners don’t understand that they must clear their shareholder loan balance, that can end up triggering significant payments from Canada revenue agency. Depending how long it has been since they have been taking money from their corporation and not clearing their shareholder loan, that amount can be quite a significant number. As difficult as that is, it’s something that can be easily avoided by understanding that they cannot owe their corporation longer than two consecutive years. This is owners should clear their shareholders loan within that timeframe to avoid being hit with additional penalties.

By understanding how to pay themselves, and how to clear their shareholders loan account, this can help business owners significantly in tax planning. It can not only help them avoid paying unnecessary personal tax, it can also help them plan how they are going to take the money out of their business throughout the year to even out any tax pumps they may have along the way.

All of these factors mean that business owners should keep extremely good records of all the money that they are paying themselves in salary and dividends. A very effective way of keeping track says Edmonton bookkeeper is by creating a bank account that dedicated only to business owners drawing money for dividends or salary. What this does is limit the number of transactions that are coming out of that account, which not only can be much easier to see all of the transactions and calculate how much money a business owners taking out of their corporation each year, but it can also help the business owner and their accountant see if there are any errors in that account.

If business owners are unaware of how their shareholder loan account works as Edmonton bookkeeper, that can create huge problems for them in their business, and in the future says Edmonton bookkeeper. As Jim Collins, the author of six books says “a culture of discipline is not a principle of the business, it is a principle of greatness”. By learning how to take money out of their business properly, business owners can develop that culture of greatness within their corporation, and use that to help them grow their business effectively.

Many business owners aren’t even aware of what a shareholder loan account is, and that is what it’s called when a business owner takes any money out of their business. Every time they take money else, it adds to the shareholder loan account, and is money that is expected to be paid back to their corporation is kept as a running total. Because it is kept as a running total, business owners need to take extremely good records of how often and how much money they’re taking out on a regular basis.

Since business owners that are taking money out of the corporation as a salary are not intending on ever paying that money back, they also need to know how to clear that amount so that it doesn’t look like they owe the corporation a significant amount of money. The way that business owners can do that says Edmonton bookkeeper, is by declaring their salary and personal dividends in their personal taxes. When they declare their personal taxes, then that they effectively clear their shareholder loan balance, and it looks as though they no longer owe the corporation and the money. It’s extremely important that business owners are keeping immaculate records of their shareholder loans not only for personal tax reasons, but in case CRA audits them. It will be extremely important for business owners should be able to prove all the money that they took out of the business was used for which purpose. CRA wants to guard against businesses that aren’t declaring all of the money that they have taken out of their business. If the business owner has taken money out of their business for use within their business, they need to be able to prove that very clearly otherwise they may risk Canada revenue agency accessing them to pay tax on money that they did not use personally.

Edmonton bookkeeper says the easiest way to keep track of all of the money that they are taking out of their business, is by creating a bank account that is sole purpose is for the business owner to take their salary and dividend out of. This effectively limits the number of transactions that are being pulled out of that account, which can be very easy to see how much money the business owner is drawing but also helps the business owner and their accountant see any errors that may have occurred in that account. we hope to see you soon.