Salary vs Dividend

/in , /by

As a business owner, you have the ability to pay yourself a salary or dividend or a combination of both. In this article and infographic, we will examine the difference between salary and dividends and review the advantages and disadvantages of each.

When deciding to pay yourself as a business owner, please review these factors:

  • How much do you need?

  • How much tax?

  • Other considerations including retirement and employment insurance.

How much do you need?

Determine your cash flow on a personal and corporate level.

  • What’s your personal after-tax cash flow need?

  • What’s your corporate cash flow need?

How much tax?

Figure out how much you will pay in tax. Business owners understand that tax is a sizeable expense.

  • What’s your personal income tax rate?

Depending on the province you reside in and your income, make sure you also include income from other sources to determine your tax rate. (Example: old age security, pension, rental, investment income etc.)

If you decide to pay out in dividends, check if you will be paying out eligible or ineligible dividends. The taxation of eligible dividends is more favorable than ineligible dividends from an individual income tax standpoint.

  • What’s your corporation’s income tax rate?

For taxation year 2020, the small business federal tax rate is 9% . Please also remember, if you pay out salary, salary is considered a tax-deductible expense, therefore this will lower the corporation’s taxable income versus paying out dividends will not lower the corporation’s taxable income.

Other considerations

If you pay yourself a salary, these options are available.

  • Do you need RRSP contribution room?

As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make.

  • Are you interested in contributing to the Canada Pension Plan?

This is unique to your circumstances and a cost-benefit analysis to determine the amount of contributions makes sense.

  • Do you need employment insurance (EI)?

For shareholders owning more than 40% of voting shares, EI is optional . There are situations worth careful thought such as maternity benefit, parental benefit, sickness benefit, compassionate care benefit, family caregiver benefit for children or family caregiver benefit for adults.

The infographic below summarizes the difference between Salary vs. Dividend.

We would also advise that you get in touch with your accountant to help you determine the best mix for your unique situation.

Contact Us

2020 BC Budget

/in , /by

BC’s Finance Minister Carole James delivered the province’s 2020 budget on
February 18, 2020. The budget projects:

  • For 2020, a surplus of $227 million

  • For 2021, a surplus of $179 million

  • For 2022, a surplus of $374 million

Personal Tax Changes

Personal income tax rates

Effective January 1, 2020, a new top British Columbia personal income tax rate of 20.5% (up from 16.8%) that will apply to individuals with taxable income exceeding $220,000. As a result, the charitable donation tax credit will also increase to 20.5% for charitable donations over $200 for taxpayers in the new bracket.

Home Owner Grant

BC will decrease the threshold for the phase-out of the home owner grant from $1.65 million to $1.525 million. For properties above the threshold, the grant is reduced by $5 for every $1,000 of assessed value in excess of the threshold.

Real property contractors

Effective February 19, 2020, the budget allows real property contractors who perform value-added work to goods and then install those goods into real property outside the province to apply for refunds of PST paid on those goods.

Training Tax Credit

Extended to the end of 2022

Farmers’ Food Donation Tax Credit

Extended to the end of 2023

Corporate Tax Changes

Film Incentive BC and production services tax credit

Effective February 19, 2020, the budget increases the accreditation certificate fee for the Production Services Tax Credit from $5,500 to $10,000.

Production Services Tax Credit Pre-Certification Notification Introduced

Effective July 1, 2020, corporations intending to claim the production services tax credit
must notify the certifying authority of their intent within 60 days of first incurring an
expenditure eligible for the tax credit.

Training Tax Credit

Extended to the end of 2022

Farmers’ Food Donation Tax Credit

Extended to the end of 2023

New Mine Allowance

Effective date to be specified, extended to the end of 2025

PST Registration Requirement

Effective July 1, 2020, Canadian sellers of goods, along with Canadian and foreign sellers of software and telecommunication services will be required to register as tax collectors if specified B.C. revenues exceed $10,000. Additionally, all Canadian sellers of vapour products will be required to register if they
cause vapour products to be delivered to B.C. consumers.

Sales Tax Changes

Carbonated Beverages

Effective July 1, 2020, carbonated beverages that contain sugar, natural sweeteners or artificial sweeteners will no longer qualify for the PST exemption for food products. PST will also apply to beverages that are dispensed through soda fountains, soda guns or similar equipment, along with
all beverages dispensed through vending machines (except vending machines wholly
dedicated to dispensing beverages other than sweetened carbonated beverages, e.g., coffee
or water machines)

Carbon Tax Rates Aligned with Federal Carbon Pricing Backstop Rates

Effective April 1, 2020, the B.C. carbon tax rates for 2020 and 2021 are aligned with
the federal carbon pricing backstop methodology, where applicable. As part of this
alignment, the current B.C. rates for shredded and whole tires are also being replaced
with a new category for “combustible waste”. Combustible waste includes tires in
any form, asphalt shingles as a new taxable combustible and any prescribed material,
substance or thing.
B.C. carbon tax rates are being updated to ensure they are in line with the latest science
on emissions. The previous rates were set in 2008 and are today considered to be based
on old science. For some fuel types, the rates are lower than their original scheduled rates.
For example, the tax rate for gasoline will be 9.96 cents per litre on April 1, 2020, rather
than 10.01 cents per litre. For some fuel types, the rates are higher than their original
scheduled rates. For example, the tax rate for natural gas will be 8.82 cents per cubic
metre on April 1, 2020, rather than 8.55 cents per cubic metre. The new rates will be
available on the Ministry of Finance’s website.
The B.C. carbon tax rates will be reviewed as part of the federal government’s review of
the Pan-Canadian Framework on Clean Growth and Climate Change in 2022.

Tax Rate for Heated Tobacco Products Introduced

Effective April 1, 2020, a default tax of 29.5 cents per heated tobacco product is
introduced. For specific heated tobacco products, this default can be changed by
regulation. A heated tobacco product is a product that contains tobacco and is designed
to be heated, but not combusted, in a tobacco heating unit to produce a vapour for
inhalation.

Property Transfer Tax

Exemption from Additional Property Transfer Tax for Certain Canadian-Controlled
Limited Partnerships Introduced

Effective on a date to be specified by regulation, a new exemption from additional
property transfer tax will be introduced for qualifying Canadian-controlled limited
partnerships. This exemption will treat Canadian-controlled limited partnerships in a
manner more consistent with Canadian-controlled corporations. It will ensure that new
housing developments are treated similarly irrespective of whether the development is
being undertaken by a Canadian-controlled corporation or Canadian-controlled limited
partnership.

The entire BC Budget can be found at https://www.bcbudget.gov.bc.ca/2020/downloads.htm#gotoNewsReleases

RRSP Tax Savings Calculator for the 2019 Tax Year

/in , /by

RRSP Tax Savings Calculator

RRSP Deadline: March 2, 2020

This is the deadline for contributing to your Registered Retirement Savings Plan (RRSP) for the 2019 tax filing year. You generally have 60 days within the new calendar year to make RRSP contributions that can be applied to lowering your taxes for the previous year.

If you want to see how much tax you can save, enter your details below!

Please don’t hesitate to contact us on how we can help you achieve your retirement dreams.

Business Owners: 2019 Tax Planning Tips for the End of the Year

/in , , /by

Now that we are nearing year end, it’s a great time to review your business finances. With the federal election over and no major business tax changes for this year, 2019 is a good year to make sure you are effectively tax planning. Please keep in mind that your business may be affected by the recent tax on split income (TOSI) and the passive investment income rules given they came into effect in 2018. These rules can be complicated, please don’t hesitate to consult us and your accountant to determine how this can affect your business finances.

We are also assuming that your corporate year end is December 31, however if it’s not, this is useful when your business year end comes up.

Below, we have listed some of the key areas to consider and provided you with some useful guidelines to make sure that you cover all of the essentials. We have divided our tax planning tips into 4 sections:

  1. Tax checklist

  2. Remuneration

  3. Business tax

  4. Estate

1) Business Year-End Tax Checklist

Remuneration

 ☐ Salary/Dividend mix

 ☐ Accruing your salary/bonus

 ☐ Stock option plan

 ☐ Tax-free amounts

 ☐ Paying family members

Business Tax

 ☐ Claiming the small business deduction

 ☐ Shareholder loans

 ☐ Passive investment income: eligible/ineligible dividends

 ☐ Corporate reorganization

Estate

 ☐ Will review

 ☐ Succession plan

 ☐ Lifetime capital gains exemption

 

2) Remuneration

What’s your salary/dividend mix?

Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your own situation consider the following factors:

  • Your current and future cash flow needs

  • Your personal income level

  • The corporation’s income level

  • TOSI rules

  • Passive investment income rules

Please also consider the difference between salary and dividends:

Salary

✓ Provides RRSP contribution

✓ Reduces corporate tax bill

• Payroll tax

• Canada Pension Plan (CPP) contribution

• Employment Insurance contribution

Dividend

• Doesn’t provide RRSP contribution

• Doesn’t reduce corporate tax bill

• No tax withholdings

• No Canada Pension Plan contribution

• No Employment Insurance contribution

✓ Receive up to $50,000 of ineligible dividends at a low tax rate depending on province

As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. For 2019, salaries of $151,278 will provide the maximum RRSP room of $27,230 for 2020.

Is it worth accruing your salary or bonus this year?

You could consider accruing your salary and / or bonus in the current year but delaying payment of it until the following year. If your company’s year-end is December 31, your corporation will benefit from a deduction for the year 2019 and the source deductions are not required to be remitted until actual salary or bonus payment in 2020.

Stock Option Plan

If your compensation includes stock options, please check if you will be affected by the new proposed stock option rules. This caps the amount of certain employee stock options eligible for the stock option deduction at $200,000 after December 31, 2019. The rules will not affect you if your stock options are granted by a Canadian controlled private corporation.

Tax Free Amounts

If you own your corporation, pay tax-free amounts if you can. Here are some ways to do so:

  • Pay yourself rent if the company occupies space in your home.

  • Pay yourself capital dividends if your company has a balance in its capital dividend account.

  • Return “paid-up capital” that you have invested in your company

Do you employ members of your family?

Employing and paying salary to family members who undertake work for your incorporated business is worth considering as you could receive a tax deduction against the salary that you pay them, providing that said salary is “reasonable” in relation to the work done. In 2019, the individual can earn up to $12,069 and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allow for child-care deductions. Bear in mind additional costs that are incurred when employing someone, such as payroll taxes and contributions to CPP.

3) Business Tax

Claiming the Small Business Deduction

Are you able to claim a small business deduction? The federal small business tax rate decreased from 9% in 2019 (from 10% in 2018) and not anticipated to increase in 2020. From a provincial level, there will be changes in the following provinces:

Small Business Tax Rate

Therefore, a small business deduction in 2019 is worth more than in 2020 for these provinces.

Should you repay any shareholder loans?

Loaning funds from your corporation at a low or zero interest rate means that you are considered to have benefited from a taxable benefit at the CRA’s 2% interest rate, less actual interest that you pay during the year or thirty days after it. You need to include the loan in your income tax return, unless it is repaid within one year after the end of your corporation’s taxation year.

For example, if your company has a December 31st year-end and it loaned you funds on November 1, 2019, you must repay the loan by December 31, 2020, otherwise you will need to include the loan as taxable income in your 2019 personal tax return.

Passive investment income

If your corporation has a December year- end, then 2019 will be the first taxation year that the new passive investment income rules may apply to your company.

New measures were introduced in the 2018 federal budget relating to private businesses which also earn passive investment income in a corporation that also operates an active business.

There are two key parts to this, as follows:

  • Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends in order to receive dividend refunds on some taxes which, in the past, could have been refunded when an eligible dividend was paid.

  • Limiting the small business deduction. This means that, for the companies mentioned above, the small business deduction can be reduced at a rate of $5 for every $1 over between $50,000 and $150,000 of investment income, or eliminated if investment income exceeds $150,000. Please note that Ontario and New Brunswick have indicated that they will not follow the federal rules.

If your corporation earns both active business and passive investment income, you should contact us and your accountant directly to determine if there are any planning opportunities to minimize the impact of the new passive investment income rules.

Think about when to pay dividends and dividend type

When choosing to pay dividends in 2019 or 2020, you should consider the following:

  • Difference between the yearly tax rate

  • Impact of tax on split income

  • Impact of passive investment income rules

With the exception of 2 provinces, Quebec and Ontario, the combined top marginal tax rates will not be changing from 2019 to 2020 on a provincial level. Therefore, it will not make a difference if you choose to pay in 2019 or 2020.

Combined Marginal Tax Rate

In Quebec and Ontario, because there are slight increases in the combined marginal tax rate, there are potential tax savings available if you choose to pay dividends in 2019 rather than in 2020.

When deciding to pay a dividend, you will need to decide to pay out eligible or ineligible dividends, you should consider the following:

  • Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)

  • Personal marginal tax rate of eligible vs. ineligible dividends

Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends. (Please note that ineligible dividends can also trigger a refund from the ERDTOH account.)

Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind, when ineligible dividends are paid out, they are subject to the small business deduction, therefore the dividend gross-up is 15% while eligible dividends that are subject to the general corporate tax rate have a dividend gross-up is 38%. It’s important to talk to a professional to determine what makes the most sense when determining the type of dividend to pay out of your corporation.

Combined Personal Top Marginal Tax Rate on Dividends

Corporate Federal Tax Rate and Gross-up factor

Corporate Reorganization

It might be time to revisit your corporate structure given the changes to private corporation rules on income splitting and passive investment income to provide more control on the distribution of dividend income. Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection. (Keep in mind you don’t want to trigger TOSI, so make sure you structure this properly.) If you are considering succession planning, this is the time to evaluate your corporate structure as well.

4) Estate

Ensure your will is up to date

In particular, if your estate plan includes an intention for your family members to inherit your business, ensure that this plan is tax effective following new tax legislation from January 1, 2016. In addition, review your will to make sure that any private company shares that you intend to leave won’t be affected by the new TOSI rules.

Succession plan

Consider a succession plan to ensure your business is transferred to your children, key employees or outside party in a tax efficient manner.

Lifetime Capital Gains Exemption

If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (In 2019, the exemption is $866, 912) where the gain is completely exempt from tax. The exemption is a lifetime cumulative exemption; therefore, you don’t have to claim the entire amount at once.

The issues we discussed above can be complex. Contact us and your accountant if you have any questions, we can help.

Understanding the Capital Dividend Account

/in , , , /by

What is the Purpose of the Capital Dividend Account?

Capital Dividend Account (CDA) is a special corporate tax account which gives shareholders designated capital dividends, tax-free. This account is not recorded in the corporation’s taxable accounting entries or financial statements. For this type of account, capital dividend is taken out from paid-in capital and not from retained earnings.

Who benefits from the Capital Dividend Account?

  • Business Owners

  • Shareholders of Private Business

How is the CDA formed through Life Insurance

  • Life insurance proceeds in excess of adjusted cost basis “(ACB)” “except” for increase in death benefit after 2013 when borrowing under a 10/8 arrangement.

  • Multi-life policies only have one ACB, therefore when each person under the policy dies, the ACB will reduce the credit to the CDA at each time of death.

What and how to use the CDA

When capital dividends are paid out to shareholders, these are not taxable. The Capital Dividend Account is part of a tax provision whose goal it is to enable tax-free money received by a company, to then be given to its shareholders, tax free. Therefore, shareholders are not required to pay taxes on these distributions.

The CDA can be complicated, please talk to us to see if this makes sense for your clients.

Accessing Corporate Earnings

/in , , , /by

One of the financial planning issues that business owners face is how to access their corporate earnings in a tax efficient way.

There are 5 standard methods:

  • Salary

  • Dividend

  • Shareholder Loans

  • Transfer Personal Assets

  • Income Splitting

There are also unique ways utilizing life insurance and critical illness insurance to access your retained earnings. Please contact us to learn how we can get more money in your pocket than in the government’s.

Financial Advice

/in , , , , /by

An advisor can help you determine where you are today financially and where you want to go. An advisor can provide you guidance on how to reach your short, medium and long term financial goals.

Why work with a Financial Advisor? 

  • Worry less about money and gain control. 

  • Organize your finances. 

  • Prioritize your goals. 

  • Focus on the big picture. 

  • Save money to reach your goals.

What can a Financial Advisor help you with? 

Advisors can help you with accumulation and protection

Accumulation: 

  • Cash Management – Savings and Debt

  • Tax Planning

  • Investments

Protection: 

  • Insurance Planning

  • Health Insurance

  • Estate Planning

How do you start? 

  • Establish and define the financial advisor-client relationship.

  • Gather information about current financial situation and goals including lifestyle goals. 

  • Analyze and evaluate current financial status. 

  • Develop and present strategies and solutions to achieve goals. 

  • Implement recommendations. 

  • Monitor and review recommendations. Adjust if necessary. 

Next steps…

  • Talk to us about helping you get your finances in order so you can achieve your lifestyle and financial goals. 

  • Feel confident in knowing you have a plan to get to your goals.