You started your business with the aim of earning money. How to pay yourself is a question that many business owners find difficult to answer. As a business owner, you can pay yourself in various ways such as salary, dividends, and shareholders loan. However, each way of paying yourself comes with its own advantages and drawbacks. Let us look at each of the ways in detail to provide you with clarity on the subject.
Paying yourself in a salary means you receive personal income. Having a personal income is advantageous in many ways. You will be able to reap benefits of retirement plans like Registered Retirement Savings Plan (RRSP) and Canada Pension Plan (CPP). Your CPP retirement depends on how much and how long you were able to contribute to the plan. Contribution toward RRSP qualifies as an important tax deduction. Hence, by paying yourself in salary, you will be able to benefit from such plans. Also, the salary or the bonus you receive will qualify for a tax deduction for your corporation. Additionally, you can benefit from income splitting by paying salary to employees in relation (like spouse or kids). However, this method of payment also has certain drawbacks. Since salary is a personal income, it will be completely taxable on your personal tax return. Moreover, you will have to contribute both as an employer and employee towards CPP.
As a business owner, you can choose to pay yourself in dividends. Dividends are paid out of profits in proportion to your share of ownership in the corporation. Paying yourself in dividends frees you of administrative hassles. All you have to do is write a check to yourself and update the details in your corporation’s minute book. Additionally, you reduce your personal tax burden as dividends are taxed at a lower rate compared to salaries. However, with dividends, you cannot contribute to RRSP and it also eliminates your chances of obtaining several potential tax deductions.
Another way to pay yourself is by withdrawing money from the amount of capital invested in the business. The amount of capital mentioned includes the initial capital as well as future contributions and purchases made on behalf of the entity using your personal funds. You can withdraw required amounts on a tax-free basis as long as the amount does not exceed your initial capital contribution and you pay the prescribed interest as set by CRA. However, shareholders loan is a loan, you must ensure you have enough resources to meet deadlines. Moreover, if you withdraw too much money and fail to pay it back within the stipulated time as per regulations it will be included in your income.
All of these are the different ways in which you can pay yourself. Whether you pay yourself in salary, dividend or shareholder’s loan depends on your business structure and certain factors such as taxation. Consulting an accounting and taxation expert will provide you with the best solution to how to pay yourself.