# Dividend or Salary, and year end?



## vinitois (May 10, 2016)

I have a corporation that takes in about 60k per year (before taxes) for consulting services. It has been registered since October 2015. I pay myself $1500/month by transferring funds from the business account to my personal. After paying myself, and all the expenses, I put the remainder in a business savings account "for tax time". I also need to keep money in the company as much as possible to fund product development. The payments I have made to myself so far are shareholder loans (I suppose), until I decide salary vs dividend. 

I'm getting ready to do my taxes now and have the following questions. I want to keep my personal income as low as possible, and keep money in the company so that I can re-invest in R&D. 

1. How do I choose when my "year end" is for my company? Does it matter? Right now, I really need to do my personal taxes for 2015, but I'm not too sure how to best claim my income. 

2. Should I pay myself as a salary? IF so, I will have to pay for CPP from both the company and personally, correct? This seems to be quite complex, doing the payroll every month etc seems like a big time-sucking overhead. 

3. Should I instead pay myself dividends at the end of the year, erasing the shareholder loans? Looks like the only downside is that this isn't "earned" income. Would I be eligible for the dividend tax credit?

4. The company work is done half at home, half at customer's sites. I provide my own equipment and control my hours and the way in which I do the work, but I have no employees. I don't think this is a "personal services business". I am doubling down on the consulting work as a form of market research, and developing a product to bring to market. There are many company expenses that are for prototyping and development. Am I correct that these expenses can offset the income from the consulting activities?

5. I personally own a vehicle which is used half for personal, half for work. How do I account for this? I do keep a mileage and costs log when I am using it for the company, and when the company is using it, I pay for the gas etc with the company card. 

6. Since the company uses a portion of my home (and workshop), how does the company pay for this access? Can the company pay the rent directly? Or refund me for a portion of it? 

7. Since the corporation is not near it's year end, how do I account for everything in the meantime? I need to file my personal taxes, so I need to account for the ~$5000 I received from the corporation in 2015. I also had employment income that ended earlier in the year. 

Thanks!!


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## fretwire (Apr 13, 2016)

I would strongly advise you to talk to an accountant. If you don't already know a good accountant ask for referrals from other people in your line of work.

A good accountant will be able to line things up as appropriate for you and modify as needed from year to year.


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## vinitois (May 10, 2016)

Thank you, I am seeing one soon. I just want to understand things for myself and would rather not pay the accountant to explain things to me. 

I have a feeling most questions on this forum could be answered with "see an accountant". In fact the forum could simply be replaced by a page that says "see an accountant". But where's the fun in that?


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## Jaberwock (Aug 22, 2012)

You can choose any year end for your company. I would avoid the December to April period when accountants are usually busy. 

If you have originally loaned money to your company, you can record the $1500/month income the company is paying you as a return of shareholder loan. There are no tax implications, since you are simply taking your own money back.
If you didn't loan money to the company, then you can't record the income as a return of shareholder loan. You could, for a short time record the income as a loan from the company to you, but the company would have to charge interest on that loan (it gets complicated).

If you pay yourself a dividend, the company will pay corporate tax on its profits, and you will pay tax on the dividend and you will get back the corporate tax in the form of a dividend tax credit (the lower credit for ineligible dividends, since you paid only the lower small business tax rate). Our tax system is set up so that when you take into account both the corporate tax and the personal tax, dividends and salary are taxed equally, so there is no tax advantage in paying yourself a dividend versus a salary. 

However, CPP (both employer and employee contributions) has to be paid on salary, but not on dividends. Paying CPP entitles you to claim CPP when you reach retirement age, so it is not a tax, it is a mandatory retirement savings plan. The way the CPP system works, you can have up to 8 years of low or zero contributions without affecting your payout. Take that into account when deciding to pay salary or dividends. 

The company expenses for prototype development are a grey area. I suspect that you can write them off, but you might have to capitalize some of those expenses. You need to talk with an accountant.

The car expenses should be easy. You have logged your kms driven. Have the company pay you a mileage allowance, see this link for rates. However, if you pay yourself mileage, any car expenses paid by the company (gas, repairs etc) need to be treated as income paid to you. You can't double dip by having the company pay your car expenses and claiming mileage as well.

If you use an accountant, make sure you understand what the accountant is doing, don't just blindly follow advice. 

A person I know started a small business a few years ago and was rightly advised by the accountant to keep his salary small, pay himself some dividends and keep his money in the company. That was great advice during the early years when the company was growing. Now the business has taken off, he is making lots of money and the business doesn't need the money. He is probably going to be in the top marginal tax bracket for the rest of his life. He could have taken more money out of the business over the years and used up some space in the middle tax brackets. Blindly following the accountant's advice means that he will be paying higher taxes to get his money out of the company.


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## vinitois (May 10, 2016)

First of all, thanks for an awesome reply, I really appreciate it. Would it make sense to have the "year end" one year after I incorporated? Does that mean I don't have to file my corporate taxes until then?

I did in fact originally invest a bunch of my own money into the company, before I incorporated. Would this count as money lent to the company that it is now paying me back? Would I need paperwork to back this up, and charge the company interest and everything? What kind of proof is required of the original investment? Basically I paid the company expenses out of my personal money for a few months to get things going. 

So basically by going dividends instead of salary, there really aren't any tax savings, but I save CPP and EI. That sounds worth it, at least for now. Side question.. if I am only a shareholder getting dividends, do I write "unemployed" or "self employed" on all government forms?

I read something about the dividend tax credit only applying if I don't have other sources of income. Is that true? If so, my employment income in 2015 will mess that up. I might be better off going to loan repayment route for the 2015 earnings, and then doing dividend only in 2016. 

Thanks for the warning about the accountant. I have about 80% faith in the person I am working with at the moment. I don't fear mistakes will be made, but I'm not expecting amazing 'optimization skills'. 

What about setting up a Family Trust? Can I be the beneficiary of a Family Trust (along with wife and kids)? I have children that will be post-secondary ages in the next decade. It would seem at first glance, that passing the dividends through the family trust would allow the income to be split between my wife and I for now (keeping personal tax rates low) and eventually to the children when they start their post-secondary.


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## Jaberwock (Aug 22, 2012)

Since you haven't submitted your first tax return, and have not yet sent any financial data to the government, you have quite a bit of flexibility in how you structure the accounts.

There are two ways in which you could have funded the company. "Capital stock" is a payment to buy the original shares, and "shareholder's loan" is a loan to the company. Usually it is better to keep the Capital Stock value low (say $100) and fund the company by way of a shareholder loan. Any personal money that you used to start up the company can be recorded as shareholder loan. I hope you kept all receipts.

You don't need to pay EI if you own the company. 

You would describe yourself as self-employed. 

Other sources of income do not affect the dividend tax credit.

You don't need to set up a family trust. You can make your wife and children shareholders of your corporation and pay dividends to them. However any dividend income paid to a child under 18 would be treated as your income.


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## vinitois (May 10, 2016)

Jaberwock said:


> There are two ways in which you could have funded the company. "Capital stock" is a payment to buy the original shares, and "shareholder's loan" is a loan to the company. Usually it is better to keep the Capital Stock value low (say $100) and fund the company by way of a shareholder loan. Any personal money that you used to start up the company can be recorded as shareholder loan. I hope you kept all receipts.


Got it. What about any test equipment, tools, etc that used to be mine but now are used exclusively by the company? Is it reasonable for the company to purchase those assets from me?



Jaberwock said:


> You don't need to set up a family trust. You can make your wife and children shareholders of your corporation and pay dividends to them.


I am interested in the other (supposed) benefits of having a family trust. I read that the assets are protected from the beneficiary's creditors, their potential spouses, etc. Specifically, I am interested in the Family Trust owning property, such as a cottage, to allow the children use of the property while maintaining its control.


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## Eclectic12 (Oct 20, 2010)

vinitois said:


> .... So basically by going dividends instead of salary, there really aren't any tax savings, but I save CPP and EI. That sounds worth it, at least for now.


I would want to be careful when thinking about dropping CPP contributions (employer + employee) being tax savings. The yearly income definitely goes up but there also won't be any payout in retirement. Question is ... will income in retirement be needed and where will it come from?




vinitois said:


> .... I read something about the dividend tax credit only applying if I don't have other sources of income. Is that true? If so, my employment income in 2015 will mess that up. I might be better off going to loan repayment route for the 2015 earnings, and then doing dividend only in 2016.


I would have thought that if any other sources of income means the DTC was dropped, there would be a write up for this. The articles I have seen sound like this is more to let the reader know that the threshold will shift down, if other sources of income are in play. It is not clear to me so maybe it is a question for a professional.

The other question is what triggering AMT does ... http://www.taxtips.ca/dtc/enhanceddtc/amt.htm


Cheers


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## marina628 (Dec 14, 2010)

When we first started we paid an accountant an hourly rate to set up our books on quickbooks(or a similar system is ok) Then I did my own bookkeeping but from time to time I would get confused on some transactions so we would have her come by every 2-3 months to do these things and teach me a bit more.Always had her do the corporate taxes and she always recommended we do pay salary up to the max CPP before we took dividends .It is expensive about $4600 per person when you consider the company share and employee share but we preferred to have that set up for our eventual retirement.


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## fraser (May 15, 2010)

You also need to be aware of any changes in the tax regime.

Here in Alberta we are going away from a flat 10 percent provincial income tax. For 2016 those in the top tax bracket will see the provincial tax burden on those incremental amounts increase by 50 percent. From 10 percent in 2015 to 15 percent in 2016. Our account told us that many high earners brought as much as possible into their personal incomes in 2015. She had never seen dividend payouts as large-often three times what was normal. Tax avoidance.


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## MoreMiles (Apr 20, 2011)

Please use December 31 as year end. If you otherwise use any mid-year day, you will have major work at tax time. All your deduction and T3 T5 receipts need to be prorated and split into 2 years. You may buy ETF with your copiration money and the calculation of ROC and ACB and all those will be extra tedious.


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## Jaberwock (Aug 22, 2012)

MoreMiles said:


> Please use December 31 as year end. If you otherwise use any mid-year day, you will have major work at tax time. All your deduction and T3 T5 receipts need to be prorated and split into 2 years. You may buy ETF with your copiration money and the calculation of ROC and ACB and all those will be extra tedious.


You would not make investments inside the corporation. Income from passive investments inside a corporation are subject to Part IV tax, at the highest personal tax rate.

If you set your year end at say October, then you can record in your books as of the end of October, a Salary or bonus owing. That will reduce your corporate profits. You have six months to actually pay it, so you can pay yourself that bonus in January and push it into the next tax year, deferring taxes for one year.


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## wendi1 (Oct 2, 2013)

Some people set the salary to maximize CPP (I do). Others with more income requirements set the salary to maximize the amount they can contribute to an RRSP.

Some don't bother with salaries, but they need to make sure they set up their retirement funds appropriately. No salary means no RRSP contribution room, and no CPP.

My year end has just passed - accountants are accustomed to year ends at all times of the year. I wouldn't worry about it (except avoid Feb-May). The accountant will tell you how much to pay CRA in CPP contributions and federal income tax - they set up the numbers for you in January and you just make the monthly contributions to CRA online or by cheque. Also how much to pay in corporate income tax and HST (and when). Make these payments on time, as CRA penalties are very expensive.


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## vinitois (May 10, 2016)

Jaberwock said:


> If you set your year end at say October, then you can record in your books as of the end of October, a Salary or bonus owing. That will reduce your corporate profits. You have six months to actually pay it, so you can pay yourself that bonus in January and push it into the next tax year, deferring taxes for one year.


My accountant recommended a similar arrangement. Why do people want to defer taxes? Is the idea that you can invest that money in the meantime instead of letting the government invest it?

My accountant also recommended I pay myself just under $3500 a year on salary to stay under the cpp minimum for the first couple of years. What would be the benefit of that over just doing a dividend? Just to have an "employed" status? I have had a "full" working career and always contributed to CPP, up to the maximum amount for several years. 

For those who want to "maximize" CPP, why? Is the CPP you receive when you're old based directly on how much you contribute, up to the max? Do you basically pay yourself this exact amount and not any more?

Doesn't the government filter for anyone who controls a corporation who pays themselves exactly the minimum or maximum CPP amounts, and look into this? 

Is it perfectly legal to pick and choose which way to pay yourself and line it up with the mins/maxes or various government programs like this?


So what is the consensus in this thread? It seems we have these options:

- Pay myself and my spouse salaries up to the max CPP contributions and pay dividends after that.

- Pay myself and my spouse salaries not exceeding the minimum for cpp and pay dividends after that. 

- Forget Salary for a few years and just do straight dividends, saving all the CPP, paperwork, and headaches. 

I can't really see a downside to the last option. It seems like corp and personal tax rates are all the same, in the end. Taking advantage of the "lowest 8 years of cpp don't count" seems like the only "savings" that can be had here. Thoughts?


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## Eclectic12 (Oct 20, 2010)

vinitois said:


> ... My accountant also recommended I pay myself just under $3500 a year on salary to stay under the cpp minimum for the first couple of years. What would be the benefit of that over just doing a dividend?


Not that I am an expert but my guess would be that the personal exemption would wipe out any income tax owing on that amount, staying under the CPP minimum avoids having to pay into CPP and the small income would also be generating some RRSP contribution room. I suspect it would reduce the amount of dividends one could receive before having to pay taxes on some of the dividend income.

If the dividends are eligible, there would also be the benefit of $1 paid in salary would count as $1 income where $1 eligible dividends is reported as $1.38 or so of income then the dividend tax credit reduces the taxes owing. This may provide a bit more room to earn a bit more income.




vinitois said:


> ... Just to have an "employed" status?


I doubt the status would be the reason but I have not done more that a bit of reading here and there.




vinitois said:


> ... Is the CPP you receive when you're old based directly on how much you contribute, up to the max?


Yes ... though like other plans, many years of high contributions being made are needed to receive the top benefit.
http://retirehappy.ca/how-much-will-you-get-from-canada/

Based on the CPP benefit formula, the business income and the business owner's expectations for investing, my impression is that most figure they can do better on their own versus being locked into the gov't plan. I suspect part of this is because for a regular employee, they pay part then the employer pays their part. Where one is the business owner, I believe the same person is covering both sets of contributions.




vinitois said:


> ... Doesn't the government filter for anyone who controls a corporation who pays themselves exactly the minimum or maximum CPP amounts, and look into this?
> Is it perfectly legal to pick and choose which way to pay yourself and line it up with the mins/maxes or various government programs like this?


The administrators have either no liability on their books (minimum income to have avoid CPP contributions) or have the full contributions to invest so I'm not sure anyone is looking into this. If the funding situation was bad this could change.




vinitois said:


> ... Taking advantage of the "lowest 8 years of cpp don't count" seems like the only "savings" that can be had here.


There is the savings of skipping CPP all together but it is counter balanced by needing to provide more retirement income. Though you seem to be saying you are already eligible for some level of CPP benefits so maybe the need is not that important.


Cheers


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