Get the dividend and pay your house cash. No need of the mortgage. Same for the car, you don't need the load or finance, if you get enough money from the dividends.
Thank you, this answers my question. I am a small time farmer and I need to save up to buy my own land. As you mentioned, bank needs a payslip to qualify for mortgage, so I will be company employee to have steady pay and remit my taxes monthly.
Corporation could buy the land though? I am just starting a farm myself and fairly certain I want a corporation for my business structure. Unsure how I want to pay myself, but I feel like the company trying to get something will happen more easily then just myself going for it.
Awesome content just a tip: put Canada or for Canadian on the video titles because often this type of videos are about USA. I almost missed you because I thought you were talking about American taxes!
Thank you for posting this I am about to start working as an independent contractor, and I am so clueless, this just raises more questions for me. Glad if you can help out: 1. How do you pay yourself a salary from the business account. Does it just involve initiating a transfer with "salary" as narration. 2. How do you also pay / remit tax on that salary amount on a monthly basis. What are the processes and steps involved in that 3. What is the process of paying yourself a dividend. Is this done periodically or once within a tax period. 4. At what point do you pay the taxes on the dividend payment. What determines the amount you get taxed on the dividend or salary payment 5. What does it mean when people say tax savings as an incorporated contractor only make sense if you retain most of your earnings (take very little money out of the business). What is the relationship between this assertion and the fact that people either pay themselves a salary or dividends 6. What is the implication of not taking money out of the corporation. Does this scenario mean higher tax savings 7. How is money retained in a corporation invested 8. Do I have to claim expenses to maximize tax savings. Is it accurate that i will only need to pay tax on a net amount after all expenses are deducted.
In terms of mortgage adjudication considerations, taking out payments in the form of dividends each month can be seen as nearly on par with salaries if the corporation has demonstrated, through its statement of cash flows, the ability to discharge its debts and liabilities -whilst having enough cashflows to pay out dividends each month.Owners use these dividends to pay for their monthly personal living expenditures such as bills and mortgage payments, no different than if the cash were received as salaries. This is the case for other than eligible dividends for the purposes mortgage adjudications. Once demonstrated to a mortgage broker/adjudicator, this income reporting strategy is just as effective and pragmatic as reporting income on a T4 slip. Cheers.
Amazing video and great information! Two important issues that were not addressed: isn't there a disadvantage to not paying into CPP? Would this depend on she and history of what one has already paid into CPP? The other one is being able to pay for WCB coverage for yourself. If you pay yourself exclusively in dividends you cannot get coverage. I am a carpenter and this would be a big consideration.
Hi joe, this is a great video. Thank you for this. I had a scenario question. If I own a small business (corporation) and the company made 97k income less 60 k expenses. So 37k profit. If 27k was paid as a dividend, that would leave 10k left over. I understand that the full 37 k would be eligible for corp taxation. Do you have a rough estimate of how much the company would likely owe in tax along with how much the individual who received the dividend would owe? Let’s say the 27k was the only personal income tax received and filed for this individual. Thank you for this guidance. I am just trying to better understand how the Canadian system works with double taxation.
To my perhaps dated and simpleton understanding of the workings of corporate business, I have always felt a natural aversion to the way corporations are set up. The whole structure is designed as a financial safeguard in which the blame should any fall is placed on a nameless? "entity" who takes all the blame....... So if there is zero responsibility and the blame is on an unknown god which is a spirit then the dealings of these "businesses" become suspicious in my eyes as I seek transparency when I purchase OR SUGGEST ANYTHING.
Thank you for the excellent information and presentation, I have a question about how to use the money in corporation in Ontario? After I paid myself salary, have some money left in corporation and paid corporation tax last year. If I pay myself dividends or salary with the corporate money this year, I will pay tax in my salary again or I can deduct the tax I paid for corporate tax last year. Thank you.
Great video! QUESTION for you! If you had a small incorporated business (1 employee--yourself) that was making steady money and you initially setup a salary for yourself, but realize now you want more personal money to spend on a larger purchase, how does one go about getting the extra dividend money from the corp? Do you simply e-transfer yourself the money from corp account to personal account and make sure you have enough tax in your corp account to cover the taxes on it at the year-end, or is it more complex than that? (i.e. forms, permissions, signatures, etc..) Thank you!
Great question! Initially, it can be as simple as transferring over the cash you need from the corp account to your personal one. The tricky bit is when it comes to the end of the year. For the calendar year, you will need to file a T5 form with CRA, so you can claim that income on your personal tax return. For your fiscal year-end (if different), you will need to have a shareholder's resolution on hand to issue the dividend for your corporate records. Remember! You will still pay tax on this money corporately (it's not an expense), so plan for that. On the personal side, you want to put some tax aside as well as the income will be grossed-up and you will get a dividend tax credit for the tax the corporation paid BUT you will still owe some extra tax personally depending on your marginal rate.
Here is my question. I am starting a small IT consulting firm. I will want to pay myself a salary, bi-weekly. When paying this salary, do I send the net bi-weekly pay from my business account to my personal account and retain the "employee" Income Tax, "employee" CPP portion and remit these to CRA from my business account. Of course, I will also in this situation, retain the "employer" match CPP portion and remit this to CRA from my business account as well. I do NOT need RRSP room nor am I am in the market of buying a house. What's confusing me is does the COMPANY pay my salary or does the COMPANY send the money to my personal account. And furthermore, I need you to help with my Ontario based corporation. How do I reach you :)
I only just incorporated my business at the end of october last year (2023) we're at the end of tax season in ontario and i guess i technically payed myself dividends (definitely wasn't bringing in enough money to keep any in the business) i feel like I've made a mess of my money and am honestly pretty embarrassed with how disorganized it all is D: do you do work for people in ontario? Hahaha help me! thanks for the video!
I have a well paying FT job and also have the opportunity to earn additional income as a freelance consultant on evenings/weekends. Are there benefits for someone in my situation to incorporate vs run a sole proprietorship? I would likely use this extra income to max out my RSP/TFSA contributions. Thank you!
Hi Mike! That's actually a pretty complex question and in typical accountant fashion, let me answer with an "it depends!" It depends on two things: 1: what type of dividend it was: eligible or ineligible, which is essentially reflective of what corporate tax rate the dividends was subject to. 2: Your personal marginal tax rate. This depends what level of income are you at and what province you live in. I think I will have to do a video on this - the challenge will be how to make it interesting haha.
Hi, thank you for this very informative video. I am retired, receiving a pension and early CPP so I am not worried about a monthly steady income/paycheck. I recently incorporated a small business. Will paying myself dividends be financially better than paying myself a small salary?
Thank you can this class of shares wording issue dividends to its shareholder Box #3 in Articles of incorporation "The corporation is authorized to issue an unlimited number of common shares." Thank you please comment.
Hi there - for questions around share rights, I would recommend checking with a lawyer. There are service provides like Good Lawyer that answer one-off questions online for a reasonable fee. They can probably help you understand your articles of incorporation better - www.goodlawyer.ca/prices/advice-session. Sorry we couldn't answer that one specifically.
How often can you pay yourself dividends? Does it raise any flags to pay yourself dividends on a quarterly basis per say? I just don’t understand how it works. Thanks
There's no limit or rules around frequency of dividend payments; however, if you owe more than $3,000 in tax in a given year, you will be required to pay tax instalments throughout the year for future years. Hope this helps!
Hi, Thanks a lot for the informative videos! Question, can you pay a self employed person and deduct that from your corporation tax? Or does he/she have to be employed by you to be able to deduct taxes from that payment?
Hi Sahin - you can pay self-employed people and deduct that for sure! These could be subcontractors, etc. Check out our video on Employee vs. Contractor as well if you aren't sure of the difference. Cheers!
You can use either option for paying yourself when you have extra profit. The video linked below shows how to calculate the expected tax payable under both options. Could help choose one over the other. ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-jEBSotyZwU0.html
Hi there - thanks for your question. If you own an incorporated business you can pay yourself via paying yourself a wage as an employee of the business or pay yourself a dividend as a shareholder. If you're self employed and run your business as a sole proprietor (not incorporated), you can still pay yourself, but you're really just taking draws out of the business bank account. I'm not sure if that's answered your question, so please follow up if not.
Hey Shiro - you can do that, but we don't recommend it. That's paying personal expenses with your business accounts which would be recorded as a shareholder draw if you're incorporated or just an owner draw if you're a sole prop. The reason we don't recommend it is that it complicates things by mixing business and personal. Check out our bookkeeping guide linked below - our "if you only take one thing away from this article" thing is to have separate accounts. www.avalonaccounting.ca/blog/small-business-bookkeeping-guide#toc-5
Hey Ivan - if that was from your banker, you might want to ask for a bit more context or check with another lender. It may be that the bank also wants to see financial information from your company to show that it is a going concern.
I am a CPA and a College professor. This has to be one of the best video presentations I've seen on this topic as it relates to a Canadian Corporation. Kudos to your presentation skills. I will definitely be using this in my classroom. Thank you.
Very true, I have been thinking about this for over a year and searched for it a few times. By far the most comprehensible and well put together video. Makes it very straight forward.
Thank you for the video. I would suggest that you maybe should have mentioned "Shareholder Loan Repayment" as an alternative early compensation for new entrepeneurs. In effect they can pay themselves up to the amount they invested back, without paying any tax on it, and that this avenue should usually be exhausted before paying yourself a salary or dividend. Is this correct or have I been misinformed?
Hi Ryan - that's a really good point. The scope of this video was really shareholder compensation, but depending on the context repaying any loans that the shareholder has provided to the corporation is a tax neutral way to get cash into the hands of the shareholder. Of course, this money has been taxed already as the loan would have been provided with after-tax dollars in the first place. We'll have an upcoming video about shareholder loans! One more point: for new entrepreneurs - make sure you put some income in your hands each year! We have had situations where new business owners have given themselves no income and missed out on their basic personal amounts (which don't carry forward).
Great video! You explained this topic very well! I have a situation to put forward. I have a Corporation that is earning multiple 7 figures annually in revenue. My wife and I are 50/50 shareholders of the corporation as well as employees to earn a salary. We are looking to purchase a 1.5 million dollar investment and personal property to build are home. The property has acreage and are plan is to live on some and develop/sell the rest. I am curious on your thoughts of this strategy. I have heard that as employees we could take a loan from the Corporation to purchase the property and thereby only be subject to Corporate tax (which I believe is 15%). Of course we would have to repay the loan as individuals back to the Corporation (which would be tax free as debt is not taxed). The way I understand it is that the only other tax that would be payed in this situation would be at an employee level if I decided to pay myself a salary from the Corporation to repay the loan as an individual back to the Corporation. Do I have this right? Also, do you think this is the best tax strategy in this case or would you recommend a different plan? Thanks!
In terms of mortgage approval considerations, taking draws in the form of dividends can nearly be on par as receiving salaries if the corporation is shown to be profitable each month and has sufficient cashflows to discharge its liabilities and expenses -and have room left over for draws. This reporting tactic only requires the accounting professional to point out to mortgage brokers adjudicators of the cashflow capabilities of the corporation . Once demonstrated on the annual statement of the cash flows ability of the company to service its bills and having the ability to pay out dividends each month is just as pragmatic as showing monthly salary. It has been successfully demonstrated with this reporting emphasis on cashflow capability for tax clients who's only source income is through other than eligible dividends in the mortgage adjudication process
A good thing of purchasing dividend-paying shares which folks don't discuss is the opportunity for share appreciation as well. Also, not to to yield chase and look for quality always 🧐🧐
This has been very helpful . I started a inc company for business development contracts in 2021. From that . I ended up opening a separate inc from one of my contracts. I now own and operate a service company. So I will take a good look at adding a holding company now, to pull through dividends etc. I also turned 65 last year and needed to control my income for retirement . Boldly going where I don’t have to rely on CANADA PENSIONS, that don’t even cover my basic needs. Thus tutorial , has given me some great options with both companies.
Hey Nolan! Thanks for the comment. It's a common misconception. You do pay taxes on those dividends, just at the corporate level. Tax rates are slightly different by province, but based on this calculator (www.wealthsimple.com/en-ca/tool/tax-calculator/) I am showing that $60,000 of ineligible dividends received (the type most small businesses will issue) would be $6,719 in Alberta in addition to the tax you pay at the corporate level. The amount where you would pay no tax at the personal level (provided you had no other income) would be around $22,000, but this is post-corporate tax money! Make sure you are entering the right kind of dividends! Most small businesses pay ineligible dividends because they pay a lower corporate tax rate!
Not paying a salary disqualifies the business owner from creating an Individual Pension Plan (IPP). An IPP can accumulate up to 60% more retirement assets as compared to an RRSP. RRSP's are the last retirement strategy a business owner should consider because it has such a small contribution limit.
Alternatively, can you work for your corporation as a contractor to withdraw money from company account and then corporation can calculate your income as expense? If that’s doable, that’s the best way instead of withdrawing dividends? TIA!
Hi, I’ve kept most of my dividends in the company and pay myself a regular 45k salary. I only take some dividends out when needed such as extra money for down payments or other projects. I was wondering if I can keep the dividends in the company and use that “extra cash” to open another corporation in the same field as in a restaurant opening another restaurant. Enlighten me please.
Important question - so #1- i do my corporate t2 tax file. #2 - I do my gst/HST filing. So since I pay myself salary, I also have to do remittance tax file? Can u explain more regarding that and how it's done?
Can a private investor - whom lives on dividends from stocks - be sheltered - tax wise - by creating a holding company - as well as a personal litigation blanket - is such a question even viable ? / I love your simplified approach - thanks for looking 😊
Could you considering making a video on all dividend income and combined. I combined and it does add extra tax and health care fees as well as cap like u mentioned.also when pulling money out of a closed corp (no more profits to tax ).I think in this scenario doing all dividend income will save alot more .do you know of a online calulator to try the different combinations. Wealth simple doesn't t work its out 5000 dollars on my situation. Thanks
I have a question. If I have a Dividend payment entering my account every month from a foreign Delaware, do I need to claim taxes again once payment goes into my bank account or am I ok since the Delaware already paid them off before it entered my account? I'm not sure if it needs to be done again by me after they do it. I don't want my bank account to get flagged for big amounts of money coming in from the dividend payment. please help
Can salary be 100% to bonus based on performance whether the organization makes profit or not? If there is no bonus I get no salary. Having to pay salary when there is no business and having to go through self loan and all that seems redundant.
tax is the most garbage thing about our world and I will not stop at any measure to stop paying it. short of legit tax evasion at least. eventually ill just move to a country with less tax.
Eligible dividends are great if you've got the GRIP balance to pay them out. Typically, your corporation will need to earn more than $500k of taxable income to create this type of "general rate income pool" balance. More info on eligible vs other-than-eligible dividends here: www.avalonaccounting.ca/blog/actual-dividends-vs-taxable-dividends#toc-5
Hey Conor! Yes, salaries are deductible for the purposes of calculating your net and taxable income in your corporation. Dividends are not deductible. Hope this helps!
Love the calmness of your presentation! Thank you so much for this video! Still have lots of questions and I’m gonna watch more of your videos to be more informative! ❤️
Assuming you had the option to be incorporated (self employed) vs working for an external organization as an employee….what is the point of being incorporated if your corporation has to pay 12.2% in corporate tax and then when you pay yourself (via dividend) you still have to pay personal income tax on that dividend? Wouldn’t your corporation still be paying roughly around the same amount of tax as someone who pays personal income tax (around 35%) that isn’t incorporated and works for an external organization as a regular employee?
Yea, the concept of integration (see link below) means that taxes should typically be the same or similar when earning revenue through a corporation or as personal income. If there are no other reasons to incorporate, then it's possible that the added cost and administrative burden means it's not worth it. www.avalonaccounting.ca/blog/actual-dividends-vs-taxable-dividends#toc-3
Of course refunds exists if at the end of the tax year, 1) you have overpaid in CPP or 2) you've taken actions towards the end of the tax year to reduce your taxable income, e.g. made contributions to RRSP
Best explanation on the Internet! Is it true that T4 salary can only be paid if the business has active income? If a CCPC earns only passive capital gain investment income, can that be used to pay T4 salary? If not, why? If yes, is there any disadvantage to doing so, such as very high tax rates? Lastly, do you have an update on when your "File Your Own Corporate Tax Returns Course" will be available --- your website still shows "Coming Soon". Thanks!
Hey Sameer - thanks for your comment! I haven't heard of limitations on paying wages from a CCPC earning passive income. Is there somewhere you can reference where you saw that? I can take a look and reply here. The corporate tax course is in the works, but delayed a bit. We expect it to be available by mid March. We'll send a note about it on our newsletter once it's ready: www.avalonaccounting.ca/weekly-tax-tips
@@AvalonAccounting I have a corp that is only realizing passive capital gains (stocks that have appreciated in value). The corp doesn't have any active business income. I have been told this is problematic if I want to issue T4 income. I think this might be because the T4 wage income can only be deducted against "active business income", so doing so isn't very tax efficient. Is this true? Will check back every few weeks for your tax course - sounds like it will be awesome. As a suggestion, it would be useful if you could sell a "premium" version of the course, where you pay more up front in exchange for some type of limited help if people have questions. Thx!
Great video! I've got a question. I was a sole proprietor, but I just incorporated. I have some assets that I want to roll over into the corporation. How do I go about paying myself for these assets?
Hmm... not sure what this would accomplish as it would just dilute the value of your shares. The value is fixed and if the number of shares outstanding is higher, the individual shares are worth less.
@@AvalonAccounting Does it though, say the business is worth 1 mm and there are 1 mm shares. Instead of paying myself 50k in salary, I pay myself 50k in SBC with shares valued at 50k or 50k shares. There will be 50k retained on the BS as cash as SBC is non-cash, thus increasing the equity balance of the corporation, so the additional shares I issued correlated 1 to 1 for every dollar retained. So now the business is worth 1.05mm and there are 1.05mm shares? What did I get wrong here? The reasoning behind this idea, is if I pay myself a salary, I get taxed at my own marginal rate, so if I want to reinvest that money back into the corporation, its 50k (1-my margnal tax rate). Whereas if I pay myself in SBC, I can reinvest 100% without getting taxed no? SBC is also pre-tax, so I lower my corporate taxable income. Please point out any flaws in my logic, much appreciated.
Hi Trevor, typically, no it can not. In some cases, if the income in the corporation was capital in nature, you will have a "capital dividend account". This account can be paid out tax efficiently. No video on this yet, but here's an article explaining them: russellinvestments.com/ca/insights/capital-dividend-account
Hi, Thanks for really informative video. We are a new tech startup (less than a year old) with two founders and no employees yet. We don't have any sale or profit and we just burn money on research and development to develop our prototype. We have raised money from investors through SAFE ( basically giving away some shares for their investment). We as founders have been paying myself dividend on a monthly basis. Since our business is small, I am not concerned about having the mortgage for a house, etc. I want to minimize the cash burnout of the company to do R&D and make our prototype. 1-Do you think that paying dividend approach is a good one for us? 2-How much tax we need to pay for these dividends ( how much on the company side and how much in our side as founders)? 3- Since we don't have sales and income (no profit I suppose, unless CRA considers raising money as profit), can we get tax-exempt dividends based on corporation's capital dividend account (CDA)? Please let me know if you have any tax recommendations or companies like us. Thanks,
Hi Pooya, Thanks for reaching out about your startup. This is a case where I would recommend contacting your accountant for some well-informed guidance. There are a lot of factors that go into making the decision, including the fact that wages may be eligible to include in a SR&ED claim which could possibly tip the scales towards wages instead of dividends. I don't know that to be the case here, but it's something to be aware of if you're doing R&D. More on SR&ED here: www2.gov.bc.ca/gov/content/taxes/income-taxes/corporate/credits/scientific-research-development Boast Capital is the provider we often recommend to help with SR&ED claims in case you end up being eligible. - Avalon's affiliate link where we may earn a fee if you sign up: boastai.grsm.io/xnevkklxthtg - Boast capital's website without Avalon's affiliate link: boast.ai/ There's more to the answer than SR&ED but it was just something that I noted from your question. Hope that helps a bit!
