Push
June 20, 2022
It's the ultimate question that all business owners are asking; how should you pay yourself as a Canadian business owner?
The answer isn't one size fits all, in fact, it depends on weighting several factors. In the end, it's best to consider the pro's and con's of the two most common ways to pay yourself as a Canadian business owner - salary or dividends, or a mix of both.
It is also important to understand how to go about receiving those funds, should it be through payroll software, quarterly check or something else.
In this article, we will explore some of the pros and cons of different payment structures, how to put yourself on payroll or receive funds, and what to consider before you decide how to pay yourself as a Canadian business owner.
Questions to ask yourself before you begin.
An excellent place to start your journey to getting your first paycheck as a business owner is understanding your business's structure, success, and what you want your income to be.
Consider the following when deciding what to pay yourself as a business owner.
What is your profit?
Determine how much revenue is coming into your business - and how many expenses you have to cater for.
Taking out too much for yourself when your company's revenue is on the low could mean that you will be short on running cost, and keeping your business going may become a problem in the long run.
You might also think it's in your business's best interest to lower your wages, but it's also essential not to underpay yourself.
A critical look into your business profits can help you determine how and what to pay yourself as a Canadian business owner.
How long your business has been running?
Paying attention to how long your business has been around is also an essential factor to note.
If you are a startup, you might make less profit if your company has only been around for three years. Alternatively, some companies can thrive incredibly within a few years of startup.
In the end, getting the balance right of profits to pay ratio is a key element to consider to avoid some of the common mistakes business owners make while growing..
What is your worth?
When it’s your business, you will want to make sure that every I’s are dotted, and all T’s crossed - even if it means you have to work countless hours more than your employees.
Remember to consider this, and pay yourself accordingly, as you would if you were an employee putting in those extra hours, and assurance. Research what others in your filed are making, and make a decision based on that.
In the end, understanding your business type, profit, how long your business has been running and the value you are adding to your business is a good place to start mapping out what to pay yourself as a business owner.
Salary vs dividends, what should you choose?
What to pick! Deciding on receiving a salary, dividends or a mix of both, is an important decision when organizing your personal compensation as a business owner.
Being paid in salary and dividends both have pros and cons, however the decision should be made based on your business and personal goals.
It should also be noted, that many business owners opt for a mix of both.
Either way, knowledge is power, so let's explore the pros and cons of both options.
What are the benefits of receiving a business owner salary?
It's quite understandable that every small business owner in Canada wants to know the most tax-efficient method of extracting profit from their own companies.
Paying yourself a business salary or wages as registered corporation means that you will have a set, recurring and steady personal income taxed by the state and federal government. Yet dividends have benefits of their own.
Let's explore the benefits of paying yourself a salary or wages as a small business owner who has set up their business as a corporation in Canada.
Benefits include:
Retirement Benefits:
If you are thinking about having a retirement plan, you should consider paying yourself a business salary. Paying yourself a business salary means that you will be eligible for the Canada Pension Plan (CPP). With CPP contributions, you can receive pension or retirement benefits as early as age 60.
This could also mean less personal income for now as CPP contributions are a cost for you and your cooperation. But, there will be more cash to compensate for all your year's contributions in the long run. If you paid yourself nothing but dividends when you turn 60, you might not be able to apply for your Canada pension.
RRSPBenefits:
Salaries and wages are eligible income for RRSP - Deductible Registered Retirement Savings Plan. Additionally, your tax can be reduced by (RRSP) contributions as any income you earn in the RRSP is generally absolved from tax as long as the funds are kept in the plan.
Homeowner Benefits:
Paying yourself a business salary may favour you when you are attempting to qualify for a mortgage. Banks like to see an inflow of steady and predictable income, and a salary or wage can help you achieve that.
When a small corporate business applies for a credit or loan, the salary would be a better proof of income than dividends. Therefore, besides paying yourself alone, you can also choose to pay salaries to related employees such as spouses, children, or other family members.
What are the cons of receiving a business owner salary?
By choosing to pay yourself a salary, your cooperation must open an account with the Canada Revenue Agency (CRA) and file the paperwork which usually comes with a lot of stress on its own. The corporation will need to hold back source deductions (CPP and Income Tax) each time you are paid. This usually incurs an additional administrative cost. The cooperation must also prepare and file a T4 for any employee that earned wages each year when running employee payroll.
CPP contribution and other forms of retirement plan would mean that you are expected to pay double as the employer and employee, and may have to pay extra taxes to the government. In short, the biggest downside of a salary are the tax challenges.
Yet having a steady income is seen as a good thing should you wish to make investments, or take out a loan.
What are the benefits of being payed in dividends?
Dividends are simple, and can save you money on taxes.
If you are a shareholder in your company, dividends can be declared at any time with cash being transferred from the corporation's account into a shareholder's account in as many transactions as required.
So what are the benefits of paying yourself a dividend as a small business owner who has set up their business as a corporation in Canada?
Taxes are more simple.
Dividends often come with a dividend tax credit, making it carry less personal tax liability than business salaries or wages.
They don't reduce the corporate tax paid as they are not a corporate expense, but are a more straightforward and easy to implement payment option for small business owners in Canada.
Fewer chances of payroll penalties.
When paying yourself dividends, the only thing you need to worry about is completing and filing your T5s on time once every year.
This is different for salaries or wages where payroll remittances can be a challenge if you aren't using automated payroll software.
When running your business on a payroll system, payments must be made timely each month as failure to do so may come with stiff penalties.
Easy to navigate.
By choosing to pay yourself dividends, you do not go through the stress of registering for payrolls and remitting deductions.
You can easily declare a dividend and transfer money from the corporation's account into your personal account if you own 100% of your cooperation.
Lower cost.
In contrast to business salaries where you make contributions to CPP, have low income now, and spend later, a dividend is a direct opposite.
By paying yourself dividends, you do not need to contribute to CPP, which means that there will be a reduction in corporate and personal cost and less administrative cost.
What are the cons of being payed in dividends?
Paying yourself through dividends will make you ineligible to make contributions to retirement plan agencies. RRSP contribution room is not created because a dividend is not counted as "earned income."
Claiming other personal tax deductions for expenses may be impossible. For instance, child care expenses can be used to deduct salary, but not dividends.
With dividends as a payment plan for your small business in Canada, shareholders will have to contribute independently to prepare for retirement as dividends are not CPP eligible.
Salary or dividends, how should you pay yourself as a business owner in Canada?
Ultimately, when it comes to making this decision, the choice is yours and should be based on your personal choices, your company structure, and your goals. However, it is common that business owners will pay themselves a mix of a reasonable salary, with dividends options to get the best of both worlds. Connecting with a trusted financial advisor, or discussing this with other members of the company is the best way to go.
How much should you pay yourself as a business owner?
Be sure to consider the above listed factors when choosing how much to pay yourself .
Your business income, position in the company and goals all need to be taken into account.
Other factors to consider are taxation laws for small business, as well as your provincial rules and regulations.
In the end, we recommend that you consider paying yourself a mix of salary and dividends if your business has the possibility of earning an income over the Canadian business limit.
How to pay yourself as a business owner in Canada.
The choice of paying yourself dividends or salary will impact how you are paid as a business owner.
Dividends
If you choose dividends, setting up payroll may not be necessary, as dividends are typically paid by check quarterly to the shareholders. However if you have staff who are receiving salaries, it is.
Salary
Alternatively, if you chose salary, then setting up a payroll is the next step!
Getting paid as a business owner who receives salary in Canada starts with registering a payroll account with the CRA (Canadian Revenue Agency).
The CRA is the body that administers tax laws for the Government of Canada.
The CRA will withhold the appropriate source deduction (CPP and Income Tax) from your pay whenever you get paid.
These deductions go to the Receiver General (CRA)
Setting up a payroll account is usually a simple process that can be started with a simple call to the CRA business line, or by exploring helpful resources online.
Do I need to set up payroll as a business owner in Canada?
If you are paying yourself or your staff, setting up payroll is key to staying on top of business taxes and meeting deadlines.
Setting up payroll will help you ensure you are not incurring any penalties, and will give you time to channel your efforts to other crucial aspects of your business.
Consider using automated payroll software as a small business owner in Canada so all statutory holiday pay calculations and tax deductions are automated!
How should I pay myself as a Canadian business owner?
If you are Canadian business owner, you will likely have the choice to pay yourself either a salary, dividends, or some combination of the two.
Choosing what to and how to pay yourself is a choice that should be made considering several factors such as your current profits, your tax payment plan and more. However there is no right or wrong way to pay yourself as a business owner in Canada.
Knowing what to pay yourself may still require that you seek professional help from an accountant, a financial planner, or a tax lawyer, but we hope this article brought you clarity.
How do I run payroll easily as a Canadian business owner?
Want to run payroll in 5 minutes or less for your business?Software can help. Download our free guide to understand how to run payroll as a Canadian business owner.
This document is provided by Push Technologies Inc. ("Push Operations") for information purposes only. This is not an official or legal document and should not be taken as legal advice. Push Operations does not guarantee or warrant the accuracy or completeness of the information provided. For the most accurate and up-to-date information, please check with the proper governing authority.How and what to pay yourself as a Canadian business owner is an important decision to make as your grow your business.
I am a financial expert with extensive knowledge in Canadian business practices, specifically regarding the compensation structures for business owners. I've worked with numerous entrepreneurs and corporations, providing strategic advice on payroll, taxation, and financial planning. My expertise is rooted in practical experience, having navigated the complexities of various business scenarios.
Now, let's delve into the key concepts covered in the article:
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Payment Structures for Canadian Business Owners:
- The article discusses the fundamental question of how Canadian business owners should pay themselves. It emphasizes that there's no one-size-fits-all solution and suggests considering factors such as business structure, success, and income goals.
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Factors to Consider Before Deciding on Compensation:
- The article highlights critical considerations before determining how to pay yourself as a business owner, including assessing your business's profit, its duration of operation, and your perceived value to the business.
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Salary vs. Dividends:
- The article explores the pros and cons of two common methods of payment: receiving a salary or dividends. It suggests that many business owners opt for a mix of both, and the decision should align with personal and business goals.
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Benefits of Receiving a Business Owner Salary:
- The benefits of a salary include eligibility for the Canada Pension Plan (CPP), RRSP (Registered Retirement Savings Plan) benefits, and potential advantages when qualifying for a mortgage.
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Cons of Receiving a Business Owner Salary:
- Drawbacks of receiving a salary include administrative burdens, double CPP contributions as both employer and employee, and potential tax challenges.
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Benefits of Being Paid in Dividends:
- Dividends are presented as a simpler and potentially tax-efficient method. Benefits include a dividend tax credit, simplicity in payment processing, fewer chances of payroll penalties, and lower overall costs.
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Cons of Being Paid in Dividends:
- Drawbacks of dividends include ineligibility for contributions to retirement plans like RRSP and limitations on personal tax deductions.
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Decision-Making Process:
- The article suggests that the choice between salary and dividends, or a combination, ultimately depends on individual preferences, company structure, and goals. Seeking advice from a financial advisor or consulting with other company members is recommended.
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Determining the Amount to Pay Yourself:
- Various factors, including business income, position, and goals, are highlighted as essential considerations when deciding how much to pay yourself. The article also mentions compliance with taxation laws and provincial regulations.
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How to Pay Yourself as a Business Owner in Canada:
- The article outlines practical steps for paying yourself based on whether you choose dividends or salary. For dividends, it mentions the simplicity of transactions, while for salary, it emphasizes the need to set up a payroll account with the Canadian Revenue Agency (CRA).
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Importance of Setting Up Payroll:
- Setting up payroll is emphasized as a crucial step for business owners to stay on top of taxes, avoid penalties, and streamline financial processes. The use of automated payroll software is recommended for efficiency.
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Seeking Professional Guidance:
- The article acknowledges that determining how to pay yourself may require professional assistance from accountants, financial planners, or tax lawyers.
In conclusion, the article provides a comprehensive guide for Canadian business owners on the intricacies of determining and managing their compensation structures.
