Vancouver Accountant | Do You Pay Salary Or Do You Pay Dividends?
Vancouver accountant states that when money is taken out of the corporation, it has to be taken out in one of two ways. It has to be taken out as either a salary or as evidence. It would be nice to be able to take out money tax-free but, according to our government, that is not allowed. We have to declare salary or dividends to cover the draws that the owners take out of the corporation.
Consider that the main difference in salary is deductible from income, advises Vancouver accountant, whereas dividends are not. They have a direct withdrawal for all of the profits, so they won’t show up on the income statements.
At Spradlin Associates, they do it differently there. They have a formalized process, says Vancouver accountant, other firms may have the expertise just like any other. However they don’t have the formalized process. The client never comes in with five well-written pages, and has everything organized and is ready to go and knows exactly what is going on.
As advice to students in the charter professional accountant program, you’re going to get a five page memo from your profs with everything you’re going to need to know about the client in real-life however, that never happens.
At Sperling Associates, we have a formalized process on what needs to be gathered at what time and how we analyse those numbers.
You can certainly haven’t corporations called personal service business risks. This is a punitive tax that will be assessed to business owners who are deemed to be an unincorporated employeet. This happens when we have more personal service business risks the personal service business risk is not however absolute. It is simply a pendulum where you either have low risk or high-risk. If you have a moderate to high risk it is preferred that salary income is used.
This can be extremely significant and can be construed as an inefficient payment strategy. It’s not unusual for someone to come into the office and for the charter professional accountant to find out that an inefficient payment strategy to the owners is costing them 2 to 3 times what it costs for accounting services altogether. Sometimes business owners start out with trying to minimize fees, and they think they hire the cheapest person in the end of pain to three times more than what it would cost to pay a good person in extra tax.
Childcare is also a huge issue in terms of deductibles and tax. It is only deductible from earned income. Although an owner might prefer to declare dividends, once you consider the childcare implications. You can only deduct childcare from salary. You have to make that determination. That might be one of the factors that would override a decision to pay dividends.
When it comes to separation or divorce, this issue can be very tricky. Sometimes there can be a separation agreement that can be based on line 150.
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Vancouver accountant says the decision whether to do salary or dividends is a really important decision one of the most common questions charter professional accountants will get asked for business owners. There has to be a deep dive into the owner circumstances, their financials, both personal and professional, etc.
Demeaned difference in salary is deductible from income, whereas dividends are not. They are direct withdrawal of the profits. So they won’t show up on the income statements at all areas
You can potentially pick up a set of financial statements or the business owners tax return, if you see them getting paid a hotter percent with salary and hundred percent with dividends. So they get paid all with one or with the other, a lot of times that is a warning sign that not enough thought has gone into the process. Most efficient payment plans have a combination of both salary and dividends. Not necessarily all the time, but certainly nine times out of 10 it’s probably not the most efficient strategy.
There can be the ability to split income between owners and family members. So one owner might have income that is not related to the business, while the other owner may in fact not. We have to determine simply not just if it salary and dividends, but who that salary and dividends is going to within the family.
Also, says Vancouver accountant, there’s implications in terms of CPP that could happen. So if you’re paying out salary, you do have to pay CPP. You can cover the employee portion of CPP when you file your personal taxes, but if you pay extra the employer portion of the CPP that amount will never come back to you.
The term of an integration needs to be discussed as when we are paying dividends theoretically there is a corporate tax component in a personal tax component. You can’t deduct the dividends from corporate income. But is there going to be a loss in the corporation? Sometimes there is no corporate tax components, so understanding what those losses were currently ongoing and sometimes in the past that we can utilize moving forward. That will also affect your decision to pay salary and dividends, because sometimes, if we have a loss, sometimes we can just pay the personal tax and ideally avoid the corporate tax.
In terms of litigation cases sometimes the dividend strategy can be a little bit more difficult in the strategy. So sometimes a simplistic salary strategy is a little easier when parties are litigating. Those circumstances can affect the decision for salary and dividends. And those are quantitative and always qualitative.
In order to be proficient at this process, Vancouver accountant states that it would definitely take a four-year undergraduate degree and three years of articling to get to a basic level of proficiency. It is simply just not that practical. The significance of this can be easily in the tens of thousands of dollars so it’s best left to a professional.