We've all heard the mantra "pay yourself first,"
either in reference to an investing strategy, or making a living as
a business owner. However, most business owners have an additional
concern. They want to know: "How do I to pay myself enough to
maintain a reasonable standard of living, while maximizing the
health of my business?"
Integrating tax management into your remuneration strategy, just
like in your business plan, can help ensure you're working with
the tax system, not letting it work against you.
To keep things simple, examples will be for a business
that's been incorporated. The owner of an incorporated business
can receive a salary, dividends, or a combination thereof. A
corporation is entitled to a lower tax rate — between 11% and
19% depending on the province/territory — on the small
business taxable income threshold of up to $500,000, and a higher
general corporate tax rate — between 25% and 31% depending on
the province/territory — on any income above $500,000. When
determining the best strategy to pay themselves a salary or a
dividend, business owners should be asking the following
How much money do you require? By
taking only what you require, you can take advantage of the
significant deferral opportunity by retaining after-tax profits in
the corporation, as the corporate tax rate is significantly lower
than the top personal marginal tax rate.
Is there a need for employment income
(rather than dividends) to make RRSP contributions or to benefit
from tax deductions, for example from those related to childcare?
If the answer is yes, then at least a portion of your compensation
must be in the form of a salary or bonus.
Is the corporation eligible for
scientific research and experimental development tax credits? If
yes, then it may be critical to keep corporate profits at or below
$500,000 to take advantage of additional refundable credits, many
of which are available to the corporation only if profits do not
exceed $500,000. In this case, the corporation will need to pay
shareholders or employees an amount that brings profits down to the
— Do you have a spouse and/or children 18 years of age or
older with little to no other sources of income? If yes, then
consider income-splitting strategies, whereby income that would
otherwise be taxed in your hands is instead paid to and taxed in
the hands of taxpayers with a lower marginal rate. One strategy
could be the payment of dividends to these family members, but that
could require a reorganization of the capital of the corporation
Developing a strategic approach to remuneration is something
nearly all business owners will agonize over. While it's an
essential part of how you run your business, it should be part of a
larger tax management strategy that fits into your business
As the saying goes, one of the certainties in life is taxes. By
making sure your business is working with the tax system, you can
avoid penalties, take advantage of tax credits and pay yourself
what you're worth.
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