There’s no better sound than that *churrr* sound the ATM makes. Dollar Dollar Bill Ya’ll but more seriously let’s kick this blog off.

So you have set up a small business corporation in Canada and are still not sure whether you should pay yourself a ‘salary’ or ‘dividend’- or you want to pay yourself both. This is one of the questions that come to the mind of every business owner.

While the right decision for you somehow depends on your business circumstances, you need to have clear insight with respect to both payment methods.

However, if you have chosen to pay yourself a salary, let’s explore what details the method entails.

Paying yourself a Salary

When it comes to determining a salary as your payment method, you must know how you’re actually paying yourself. First of all, you will need to register for a payroll account with CRA the Canada Revenue Agency. For that, you need to contact the concerned CRA department and ask them to set up a payroll account.

Your account will have the same business number as your corporation, but it will also include the RP number as opposed to the RC, which is usually present at the end of your BN. When you pay yourself a salary from your business, a deduction will be made from your corporate net income. Nevertheless, you will have to pay the tax on the received salary and declare it on your personal tax return.

Besides that, you will also be making payments to the Canada Pension Plan (CPP). To give you a clearer understanding, we are sharing the common methods that explain how you can pay yourself salary throughout the year.

Declaring the Bonus at the End of the Year

With the fiscal year end approaching, most business owners in Canada seek to make important decisions in order to reduce their annual taxes, and you’re probably one of them. With that being said, the most appropriate method to reduce your yearly business taxes is paying out bonuses.

Being in the corporate world, you probably know that every business owner whose corporation earns more than $500,000 is subject to pay tax at a higher rate 28%+. However, those who earn $500,000 or less are taxed at the rate of 14%.

In order to avoid a higher tax payment, declare a bonus to reduce your company’s profit to not more than $500,000. Since you have declared the bonus by the end of fiscal year, it will come under a tax deduction, even if you don’t pay it.

However, on receiving a year-end bonus, you will have to pay personal tax at your marginal tax rate.

Periodic Remittances

Sometimes, your corporation’s cash flow can be tight and you can’t afford to take a year-end bonus. In such cases, you can pay remittances on a periodic or quarterly basis; this will also allow you to manage your cash flow effectively.

Furthermore, paying yourself a salary on a periodic basis ensures that you receive personal income throughout the year and not as a lump sum amount only at the year end.

What about Monthly Remittances?

Of course, not every business situation is alike; your business profits can also be predictable. This means that you can set payroll remittance to be paid to you every month by scheduling it through CRA payroll calculator.

Furthermore, getting paid each month makes your T4 (a salary slip issued by CRA) manageable and easy to calculate at the year end.

Payroll Software

If you’re not sure whether to take a year-end bonus, monthly salary, or personal quarterly or periodically income, you can use some amazing payroll applications. These apps calculate your remittances and make the required payments. #Wagepoint #KnitPeople

Once it’s done, the amount is transferred to your payroll account automatically. There is no denying that you can’t trust every application and you can’t decide which of them is right to use, either. Therefore, you will need to do your research before registering for your remittance on any application.

Why you should decide to pay yourself a Salary as a Business Owner

So, if you decide to pay yourself a salary through your corporation, the biggest benefit is that you will get a personal income. Secondly, as you will be paying a certain amount of your income to the CPP, you will receive several benefits from the Canada Pension Plan after your retirement.

Furthermore, by paying yourself a year-end bonus, you can defer your corporation’s tax payments. This way, you will be able to minimize your corporate taxes by the bonus amount. Furthermore, the method also allows you to split your income by paying remittance to related employees, such as your children or spouse.

Also, when you select a salary method, you will be able to contribute into TFSAs or RRSPs, which serve as an investment for retirement.

The Bottom Line

Despite the level of complexity associated with each payment method, choosing to pay yourself a salary is the most practical. Since we have provided all the basic information related to the method, we hope you won’t find it difficult to select a ‘salary’ as your income method. Ultimately, the Salary will be taxed based on how much your gross income you take out. If you don’t want to pay more payroll taxes simply leave the money in the corporation.

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team