Free consult & free copy of book

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

Contact Us

Stars

Most 5 star CPA Google reviews in Canada

Read Reviews

Chartered Professional Accountants E Myth

1 Fixed Monthly Fee - Planning | Accounting | Taxes | Consulting

Helping Canadian businesses beat the odds!

Edmonton CPA | Getting Lucky Knowing The Difference Between Salary And Dividends

Edmonton CPA says that conversations should be had aplenty with a small business owner and the charter professional accountant about certain things in regards to how they’re going to pay the business and how they’re going to pay themselves.

First off, let’s consider the fact of what exactly different between a salary and a dividend is. When a small business owner takes money out of their corporation, and hopefully they are indeed incorporated to alleviate some potential problems, that money has to be taken out in either one of two ways.

It has to be taken out as part of a salary or as dividends. Edmonton CPA understands the fact that small business owners feel as though it would be very nice to be able to take the money out tax-free. However, the government needs to get their money somehow so they’d tax it. Remember that you are going to have to declare salary or dividends to cover what you have taken out of your corporation.

There are many difference between salary and dividends, however the main difference in salary is it is deductible from income. Completely opposite to that, dividends are in fact not. They are a direct withdrawal of the prophets. They will not show up on any of your business income statements at all

There is a reference to and of course this is theoretical, but there is a reference to the fact that the dividends aren’t deductible from income. This is true when you have to pay corporate and personal tax on those deductibles. When they are referring to the fact that obviously theoretically, the tax rates, when you add up the corporate tax rate in the personal tax rate, on dividends, which is roughly approximate the same tax rate as on the salary. However, in practice, there are so many variables that go into this practice. The integration, although theoretically, the purpose doesn’t actually considered that way.

Edmonton CPA says the decision to remit salary or dividends is a critical one. In fact, it is one of the most imperative questions that is asked from business owners to charter professional accountants. When this happens, the charter professional accountant needs to do a very thorough investigation into the owners circumstances both personally and for the circumstances of the business. Not necessarily personally but personal bank accounts. And professional bank accounts.

You can certainly pick up a set of financial statements or the business owners tax returns if you’d like to investigate further,. As well, make sure that you are considering the fact of childcare, and hopefully, although you hopefully will not have to deal with this, separation or divorce.

Separation and divorce can be a very difficult one to manoeuvre around. Sometimes there can be separation agreements that can be based on line 150 of the notice of assessment, and your tax return. However, it will infection in fact be higher even though the net payment to the shareholder would in fact be the same.

If You Are Looking Forward To Finding Our Edmonton CPA?

Edmonton CPA next the fact that they are moving expenses then it can be similar to the childcare issue that we talked about a while ago, where you have to have salary in order to deduct those particular moving expenses for yourself and your family. Edmonton CPA says sometimes to have better dividends but to have moving expense is, sometimes that shifts the pendulum back to salary, and you can no longer accrue dividends. The reason for this is because sometimes you need salary in your new location to deduct those moving expenses altogether.

Also, in terms of litigation, sometimes the dividend strategy can be a little bit more difficult to be considered in in the great litigation strategy. Sometimes a simplistic salary strategy is in fact a little easier. It is easier, when parties are litigating.

The circumstance can affect the decision for salary and dividends. Those are often an almost always quantitative and qualitative.

There are often as well, says Edmonton CPA, if you’re not careful penalties that you can accrue. These are called, in regards to corporations, personal service business risks. Again, this is a punitive tax that will be assessed to business owners who are deemed to be an incorporated employee. We do not necessarily want more personal service business risk, however the personal service business risk is not necessarily absolute, so you don’t necessarily have to worry about it.

Consider the fact that it is a pendulum when you either have low risk or high-risk. If you have a moderate to high risk, it would just be preferable to revert back to the salary income.

In fact, as well, sometimes the family members corporation will be associated for a small business in terms of accessing the preferred small business 12% tax rate, at least in Alberta Canada. Sometimes the family members corporations are sharing the limit to that small business tax rate, which is $5000. If that is in fact the case and that is your situation, we are at risk of going over the small business threshold of that $5000. We might want to declare salary in order to get us back down under the threshold. Sometimes it’s not just the $5000 in one business. Sometimes, if the total income from all the corporations in the family are taken under consideration and into consideration, then they are considered associate.

Consider giving yourself some homework in looking over some financial statements and tax returns. It is not at all agreeable or understandable strategy if you are getting paid a hotter percent with salary or her percent with dividends. It’s just not smart and it looks as though you just do not have a good business plan. The most effective business plans have a combination of both dividends and salary. Not necessarily all the time, however nine times out of 10, it certainly the most effective strategy.