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Edmonton CPA says that there are many considerations that you should think about in terms of whether you are going to implement a salary structure or a dividend structure. This is not often an easy decision to make, and their are a lot of idiosyncrasies and intricacies involved with making the right choice. This is something that potentially only you with your charter professional accountant will be able to be able to delineate all of the positives from salary and positives from dividends.
We mentioned about integration a lot in business. When you are paying dividends, there is a lot of theory to this in that there is a corporate tax component and a personal tax component. The reason why there are corporate and personal tax components different from each other, is the fact that you can’t deduct dividends from corporate income. However, if there is going to be a loss in the Corporation than that is a different matter. Sometimes there is no corporate tax component at all. Understanding what those losses were currently, ongoing, and sometimes in the past, we can utilize moving forward. That will affect our decision to pay salary and dividends. The reason for this is because if we have a loss, sometimes we just pay the personal tax and completely avoid the corporate tax altogether, which can set you back.
As well, Edmonton CPA mentions the fact that there are particularly family members and the Corporation with which they may in fact be able to access and belong to. They will be assessed with a small business in terms of accessing the preferred small business 12% tax rate that you can get in Alberta Canada. Sometimes however, the family members corporations are in league with each other and business partners. They are sharing that limit to the small business tax rate. In such as this case, we are not at risk of going over the small business threshold of $5000. However, if we are in fact worried about going over the threshold, we might want to declare salary instead of dividends. This will potentially get us back down under the $500,000 threshold. As well, sometimes it’s not just $5000 in one business. Sometimes if the total income from all of the corporations in the family if they are in fact associated with each other.
Be aware, warns Edmonton CPA, that there is a specific system if you happen to be in arrears or in problems with anything associated with the business tax. You can instill punitive damages, or what is more common a punitive tax. This punitive tax will be assessed to you, the business owner, if you are in fact deemed to be an incorporated employee. So be aware. When we have more personal service business risk, the service business risk is not at all absolute.
Consider thinking about o’clock pendulum going back and forth. When you either have low risk or high-risk. If you have a moderate or high-risk we start to prefer salary income.
Edmonton CPA describes the salary and dividends in the form of the following example… When money is taken out of the Corporation, it has to be taken out in one of only two ways. There are no other ways around it it’s these two ways or no ways. It has to be taken out as either a salary or as evidence.
Yes everybody is well aware that it would be so nice not to be paying any tax on anything let alone taking out your own money. However, this is obviously not the case and you will have to pay tax on this as well. It is not tax-free as the government is always going to want its cut as well. We have to declare salary or dividends in order to cover the owners and the fact that they have taken out of their Corporation.
Edmonton CPA states the fact that there are a few differences in salary versus dividends. When the main differences and one of the differences that is most easy to understand in terms of new small business owners, is salary is deductible from income. Dividends, on the contrary, are in fact not deductible from income. They are instead a direct withdrawal of the prophets. So they will not at all show up on the income statements.
What the small business owners are referring to is basically theory, says Edmonton CPA. It’s this theory that the dividends aren’t deductible from the income when you have to pay corporate and personal tax on. Likewise, what they are referring to is, again theoretically, the tax rates, when you add up the corporate tax rate and the personal tax rate on dividends. This addition should roughly approximate the tax rate on the salary as a whole. As well, it practice there are so many other variables as well this may not be absolute. There are a lot of variables that go into that.
The integration although theoretically, the purpose doesn’t actually work out that way.
Many decisions have to be taken into account not the least of which is salary or dividends for your small business. In fact, it is worth a discussion with a charter professional accountant about how you’re going to tackle this dilemma from within your business. Do not necessarily worry that you are far from the only one discussing this with a charter professional accountant it’s one of the most common questions that CPAs get asked from business owners.
What your charter professional accountant, upon talking about this is going to do is they are going to take a very close look into your personal circumstances, and your business circumstances. It is kind of a purge as such. This can be extremely significant in terms of an inefficient payment strategy. It is not necessarily unusual for someone to come into the office and find out that they are under an inefficient payment strategy.
