Salary OR Dividend – Which Option is Better For You and Your Corporation?

Salary OR Dividend

There is always a question when you start your own business whether you should withdraw salary and/or dividend out of the corporation. There are pros and cons for both salary and dividends, and we will go through them so you can decide which one is best for you and your corporation.

Pros and Cons of Withdrawing Salary Out of The Corporation

First, we will discuss the pros and cons of withdrawing salary out of the corporation. We will discuss how it will affect taxes, expenses, and cash flow.

Pros of taking out of the salary

  • Salary is an expense for the corporation, this helps to reduce the corporation’s taxable income and reduces the corporate tax
  • Salary helps you to better plan for retirement, which means the salary requires the contribution to CPP, which is one of the components in the retirement plan.
  • The salary creates RRSP contribution room. RRSP is tax-deductible and helps to reduce individual taxes.
  • Salary is required to utilize the personal income tax credits like child care expense and medical expenses
  • If you withdraw the salary, the corporation will issue T4. For financing, mortgage companies or financial institution accepts T4 and help to qualify for mortgage/line of credit
Pros of Salary

Cons of taking out of the salary

  • Salaries are taxed at the highest-level results in the higher tax.
  • Payroll remittance is required every month, and at the end of the year, T4 will be issued to the employee. This will be regular and annual exercise and failure to do will result in stiff interest and penalty
  • The employer has to contribute to the CPP and EI, this will be an expense to the corporation. However, it contributes to the reduction in the corporation cash flow. Effective 2019, the CPP cost is increasing and overall there will be a 20% increase in CPP over the 5 years.

Pros and Cons of Withdrawing Divedend Out of The Corporation

Next we will discuss the the pros and cons of withdrawing divedend out of the corporation and the effects it has on taxes, income, and expenses.

Pros of taking dividend

  • Dividends incur no payroll source deduction and No T4 annually
  • Dividends are paid after corporate taxes. Therefore, dividend results in lower taxes on the individual tax return.
Pros of taking dividend

Cons of the dividend

  • Dividends do not create RRSP room as it is considered as passive income instead of earned income
  • Dividends do not create CPP as your future retirement income since no CPP contribution required
  • Dividends do not utilize the personal tax credits such as childcare expenses
  • Dividends should be reflected in the corporate minute books and your article of incorporation must allow the dividend to be paid out.

Conclusion

Salary or dividend depends on the owner’s preference, the goal for the future and how much money owners require in the short and long term.

One option may not fit all. Some situations may require you to consider a mix solution of salary and dividend. Versatile Accounting and Tax provide some help with those options before the year ends. Our Calgary CPA experts will provide the tax scenario of salary versus dividend to provide you with the best alternative. If you have any questions or would like to book an appointment, feel free to contact us

How to pay taxes online with CRA MyPayment

How to pay taxes online with CRA MyPayment

Paying for taxes online is simple with CRA MyPayment. We have created this step-by-step guide to show you how easy and convenient it is to pay for personal or corporate taxes online!

Step 1: Visit Government of Canada – My Payment Website

Click on the following link, this will allow you to make direct payments to CRA (Canadian Revenue Agency):
https://www.canada.ca/en/revenue-agency/services/e-services/payment-save-time-pay-online.html

Step 1: Visit Government of Canada - My Payment Website

Step 2: Select the “Pay Now” button

Step 2: Select the “Pay Now” button

Step 3: Select the type of payment you are making
You will be given 4 different options, Individuals, Businesses, Non-residents, and Trusts. Most of you will choose an option under Individual or Businesses

Step 3: Select the type of payment you are making

Step 4: Continue to Select the kind of Payment You Are Making
Once you have chosen a link under one of the options, you will be taken to another set of links related to that kind of payment.

For example, if you select “Individual Income Tax (T1)” you will be taken to these options

Step 4: Continue to select the kind of Payment You Are Making

Step 4: Enter your SIN or Business Number and The Amount You Will be Paying
You will need to enter your SIN or Business Number and the amount you will be paying to continue.

Step 4: Enter your SIN or Business Number and The Amount You Will be Paying

From here you will need to confirm the details of your transaction and provide payment information. You will be directed to your banking information to make the payment.

*Note* In order to pay online you must have a debit card with either the Interac logo, the visa debit card logo, or the Debit Mastercard logo.

Still Need to Complete Your Personal or Corporate Taxes? We can Help!

If you still need to complete your personal taxes or corporate taxes, Versatile Accounting can help. Contact one of your locations today to get started.

Changes to Taxes of a result of COVID-19

Changes to Taxes of a result of COVID-19

Dear Clients,
As the news is ever-changing and there is an abundance of information available, we want to reach out to you to update you on the most recent developments with regards to taxes. In response to COVID-19, on March 18, 2020, the Government of Canada announced that they will be extending the personal tax filing deadline to June 1, 2020, with the payment deadline now being August 31, 2020. Please see the following excerpt from the Government of Canada’s website:

Flexibility for Taxpayers

In order to provide greater flexibility to Canadians who may be experiencing hardships during the COVID-19 outbreak, the Canada Revenue Agency will defer the filing due date for the 2019 tax returns of individuals, including certain trusts.

  • For individuals (other than trusts), the return filing due date will be deferred until June 1, 2020.  However, the Agency encourages individuals who expect to receive benefits under the GSTC or the Canada Child Benefit not to delay the filing of their return to ensure their entitlements for the 2020-21 benefit year are properly determined.
  • For trusts having a taxation year ending on December 31, 2019, the return filing due date will be deferred until May 1, 2020.

The Canada Revenue Agency will allow all taxpayers to defer, until after August 31, 2020, the payment of any income tax amounts that become owing on or after today and before September 2020. This relief would apply to tax balances due, as well as instalments, under Part I of the Income Tax Act. No interest or penalties will accumulate on these amounts during this period.

In order to reduce the necessity for taxpayers and tax preparers to meet in person during this difficult time, and to reduce administrative burden, effective immediately the Canada Revenue Agency will recognize electronic signatures as having met the signature requirements of the Income Tax Act, as a temporary administrative measure. This provision applies to authorization forms T183 or T183CORP, which are forms that are signed in person by millions of Canadians every year to authorize tax preparers to file taxes.

The Canada Revenue Agency is adapting its Outreach Program to support individuals during COVID-19. Through this service, the Canada Revenue Agency offers help to individuals to better understand their tax obligations and to obtain the benefits and credits to which they are entitled. Traditionally available in-person, this service is now available over the phone, and through webinar, where possible.

The Canada Revenue Agency fully expects that many community organizations are considering whether to significantly reduce or perhaps cancel the provision of services provided under the Community Volunteer Income Tax Program. Additional efforts to encourage individuals to file their tax and benefit returns electronically, or where possible, through the File My Return service, will be put forward.

There are also some changes for Businesses Filing Taxes:

Flexibility for Businesses Filing Taxes

The Canada Revenue Agency will allow all businesses to defer, until after August 31, 2020, the payment of any income tax amounts that become owing on or after today and before September 2020.  This relief would apply to tax balances due, as well as instalments, under Part I of the Income Tax Act. No interest or penalties will accumulate on these amounts during this period.

The Canada Revenue Agency will not contact any small or medium (SME) businesses to initiate any post assessment GST/HST or Income Tax audits for the next four weeks. For the vast majority of businesses, the Canada Revenue Agency will temporarily suspend audit interaction with taxpayers and representatives.

The Liaison Officer service offers help to owners of small businesses to understand their tax obligations. Traditionally available in-person, this service is now available over the phone and will be customizing information during these challenging times by ensuring small businesses are aware of any changes such as filing and payment deadlines, proactive relief measures, etc.

Versatile Accounting is still here to serve you during this time and we will continue to prioritize your personal accounting and business accounting needs. 

For additional information regarding these changes, please see:

Thank you,
Karim Bharwani, CPA CA