If you are a business owner, what level of compensation should you take out of your company and in what form? This is a major issue business owners face each year.
Most business owners do not take the time to work out the best tax and business planning possible. It is crucial for you to plan and have a good idea about what factors should be taken into account because there are potential problems and pitfalls to consider. The best way to ensure your success is to seek professional advice.
TAX TIP An obvious factor is to calculate what you need for your living expenses. If you withdraw most of the corporate income for that reason, you ought to ask whether having the corporation makes sense. If you need assistance determining your ideal compensation amount, please contact us now.
As business owner, you usually know the amount of money you need. However, the decision on whether to take it out in the form of salary, bonus or dividends is a lot less straight forward. A lot depends on how much income the company generates and your personal tax situation.
- We often recommend you not take out more than you will need because the corporate income is generally taxed at the lower tax small business threshold. When you eventually withdraw the funds, the overall corporate/personal tax cost rises substantially if you did not keep the corporate tax rate as low as possible.
- Take enough salary income (dividends do not count) from the company to maximize your RRSP registered retirement savings plan contributions. The maximum RRSP contribution for 2016 is $25,370 and individual amounts are calculated based on your earned income for 2015. For example, you would need to earn $140,944 to be able to contribute the maximum limit to your RRSP.
- Although most people don’t consider their CPP Canada Pension Plan contributions, you need pensionable earnings of about $54,900 in order to maximize your coverage.
- If you employ your spouse or child, even on a part-time basis, he/she can earn about $12,000 without having to pay any personal tax. As long as the money is paid for actual work performed, you end up with a nice deduction at the corporate level without any income tax at the personal level.
TAX TIP If your company is not considered an “active business” for tax purposes, it loses out on valuable benefits. Therefore, the tax planning considerations may change radically. Please contact us now for valuable tax minimization strategies for your company.
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