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Helping Canadian businesses beat the odds!
Hi, I’m here with a cold corporate and we’re discussing today a salary or dividends to pay business owners on CPA. So cool Edmonton CPA. You’ve been there. You’re a new hire here. So talk to, talk to us about your journey to the firm.
Oh well it’s been a, been a long one but it quite quite a few firms but finally found one that was just right for me. I’m really enjoying it here. Everyone here is great Edmonton CPA. We get along well with everyone or learning a ton. A lot. A lot of new programs to, to learn.
Yeah. And where did you graduate from? From Grant Macewan. Grant Macewan and said your four year degree there and we just found out today calls a toddler. He flames fan. So we’re still, we a little bit unsure if we’re going to keep them. Actually should’ve waited a couple months left. Let that one out of the bag. Yeah. So, Edmonton CPA, what questions do you think it’s important for business owners to ask coal when deciding whether to pay dividends or salary to the owners?
First off, why do you owners have to declare salary or dividends?
So ultimately when money is taken out of the corporation, it’s got to be taken out in one or two ways. If it’s going to be taken out at either a salary or dividends, now it’d be nice to be able to take out money tax free forever. But unfortunately that’s the allowed, Edmonton CPA, eventually we have to declare salary or dividends to cover the draws of the owners of the corporation. What’s the difference between the two? So the main difference between the two is salary is deductible from income, where as dividends are not the deductible from income, there are direct withdrawal of the profit, so they won’t show up on
the income statements when people claim that the salary dividend and corporate tax rates are integrated, Edmonton CPA is that correct?
Um, so what they’re referring to is they’re referring to, you know, theoretically as the dividends aren’t deductible from income when you have to pay corporate and personal tax on it. So what they’re referring to is theoretically the, uh, the tax rates when you add up the corporate tax rate and the personal tax rate on dividends should roughly approximate the tax rate on the salary. But in practice, there’s so many variables that go into that, but the integration, all theoretically the purpose, Edmonton CPA it doesn’t actually work out that way.
Okay. Should owners pay themselves a salary or dividends?
So the salary that, uh, the decision whether to do salary noon is really important decision. It’s probably one of the most common questions we get asked from business owners. And I always tell people if anyone answers to that question right away, they don’t know enough about the subjects in order to really determine if you should do salary dividends. There’s kind of a deep guy that has to be done until the owner’s circumstances and the circumstances of the Edmonton CPA
this. Okay. How significant can an inefficient payment strategy to the owner or their family be to a small business owner?
Um, it can be extremely, uh, it can be extremely significant. It’s not unusual for someone to come into her office and for us to find out that an inefficient a payment strategy to the owners is, you know, costing them two to three times what it costs for accounting services. Sometimes it’s, you know, business owners start out with trying to minimize fees and and they think they, they hire the cheapest person and they ended up paying two or three times what it would cost the payer, good person in extra tax. So Edmonton CPA are there some morning
six signs that the payments strategy to the owner is not being done correctly?
Yeah. One of the most common ones is if you pick up a set of financial statements or business owner’s tax return, if you see them getting paid on 100 percent with salary or 100 percent with dividends, so they have all of one or all of the other. A lot of times that’s a warning sign that not enough thought has gone into it. Most efficient pay appliance have a combination of both salary ended, Edmonton CPA but it’s not necessarily that it’s not the most inefficient, but that’s one of those, you know, nine times out of 10 when you pick it up with it’s all one or all the other. It’s probably not the most efficient strategy.
Okay. How does other income not related to the business effect the decision to pay salary or dividends Edmonton CPA?
Um, well, I mean there can be, you know, the ability to split income between owners and their family members. So one owner might have income that’s not related to the business, the other owner, uh, you know, may not, so, you know, we have to determine a, you know, not just if it’s salary dividends, but you know, who that salary given and this is going to within the family. Um, you know, also there’s, you know, things like CPP implications that can happen. Um, so if they’re, if you’re paying out salary, you do have to pay CPP and you couldn’t recover the employee portion of CPP when you follow your personal taxes, but if you extra paid and the employer portion of CPP, that amount just kinda goes up and to see Herei never, Neverland and never really comes back to you. Uh, so you can Kinda, you know, bird a couple thousand dollars pretty quickly with things like that. Edmonton CPA. How can childcare expenses affect the decision to use salary and dividends? Yeah, there’s, there’s some expenses like childcare, there are only deductible from earned income, so you know, although dividends for a particular business owner might be preferring to declare dividends and once you consider the childcare implications, you can only deduct the childcare from salary. So otherwise, you know, you have to make that determination that I’d be one of the factors that would, that would override a decision to pay dividends.
Okay. How can divorce affect the decision to pay salary dividends?
This can be a tricky one. Sometimes you know, there can be separation agreements that are based on line 1:50 in line when 50 will be higher with dividends, even though the, the, the net tax to the net payment to the shareholder would be the same. I’m also in terms of litigation, sometimes a dividend strategy can be a little bit more difficult to um, you know, kind of portray to analytic strategy. So sometimes a simplistic salary strategies a little easier for ’em when parties are litigating so thing. So those circumstances can affect the decision for salary dividends and they’re both quantitative and qualitative. Okay. Can have family members, corporation or the corporation have a business partner affect your decision to pay salary or dividends? Yeah, you can have. Sometimes family members corporation will be associated for small business. Uh, so in terms of accessing the, you know, Edmonton CPA the 12 percent small business preferential tax rate, sometimes family members, corporations are sharing the limit to that small business tax rate. So you know, if that’s the case, if we’re, if we’re at risk of pain, the going over that a small business thresholds of 500,000, um, you know, we might want to declare salary to get us back down under and it’s not just $500,000, one business sometimes it can be. We have to total up the income from all the corporations and the family if they’re associated.
How can moving expenses affect the decisions? Edmonton CPA. Salary or dividends, I’m moving expenses are there similar to the childcare issue where you have to have a salary and in order to deduct those moving expenses. So again, if you know otherwise dividends would be better, but you have moving expenses. Sometimes that shifts depending on back to salary because you need, you know, salary in the new location to deduct the moving expenses. Okay. How can past or future losses in the business effect the decision? Yeah. This can be one where we talked about the integration where when you’re, when you’re paying dividends, theoretically there’s a corporate tax component and a personal tax component because you can’t deduct the dividends from corporate income, but it’s going to be a loss in the corporation. Sometimes there is no corporate tax component, Edmonton CPA so you know, understanding what those losses were, you know, currently ongoing possibly in the past that we can utilize moving forward. That will affect our decision to pay salary dividends because sometimes we can, if we have lost, we can just pay the personal tax and avoid the corporate tax. Okay.
Ken contracts with customers and suppliers affect your decisions to pay salary or dividends? Yeah, Edmonton CPA you can have incorporation is what we call a personal service business risk and what that is is essentially a punitive tax that will be assessed to business owners who were really deemed to be an inc employee. So when we have, you know, more personal service, business risk, and it’s a personal service, business risk is not absolute. It’s kind of a pendulum where, you know, you either have low risk or high risk, there’s no real definitive test, but if you have a high risk for personal service, business risk, or even a moderate risk, we start prefer preferring salary, Edmonton CPA, because even if they do assess the higher corporate rate on the personal service business risk, if it’s been paid out, it’s salary, it’s a higher rate of, of something that’s been netted off with salary already.
So, okay, how long would it take to teach someone about all the issues that could potentially affect the decision to use salary dividends? You know, really it would take a four year undergrad degree and uh, uh, three years of articling, you know, to get to the point where you’re a, a basic level of proficiency. So Edmonton CPA it is one of those areas where it’s, although business owners would love if there is a one size fits all and you can learn it in a weekend course, it’s not really practical. And the significance of the decision, you’ll can be, you know, five, 10, 15, $20,000 easily. So it’s, it’s something that is really best left to a professional. Um, and you know, that’s the best way to go about it. There’s no quick fix or one size fits all solution. How does your firm analyze all the variables required to issue tax efficient strategies?
Uh, so I mean, that’s what we do differently here is we have a formalized process. Um, you know, other firms, sometimes they have the expertise to do it, but they don’t have a formalized process. You know, what I tell guys like you and you’re going through the CPA program, you’re gonna to get tasks and they have case studies in the test and you’re going to get a five page memo with everything you need to know about the client. Edmonton CPA, in real life that never happens. The client never comes in with five low written pages of everything you need to know to make the decision. Uh, so we have a formalized process and what information needs to be gathered at what time and how we analyze those numbers. So it makes sure that, you know, when you’re, the, the client is not, you know, dependent, it’s not the client’s responsibility to tell us the right information, it’s kind of more our responsibility that we have to have a process in place to get the right information and then we have, you know, over the last seven, eight years that we’ve been in existence, Edmonton CPA we’ve been perfecting and improving upon our process to run the numbers and analyze which alternative is better.
So, uh, a leaking, get the numbers more reliably and then B, we can process them efficiently to so the client, they can get an efficient tax plan. I’m really, you know, spending an exorbitant costs to try to, you know, have people by the hour to do that. So yeah. So that’s what we have here today. Edmonton CPA We really appreciate any comments that you have and A. Yeah, we look forward to, to hearing from you and doing another episode of. Okay, thanks very much. Thanks.