Can You Pay Yourself a Management Fee Instead of Salary or Dividends?
As an incorporated business owner in Canada, one of the most important and pervasive questions (certainly from my point of view) you face is how to pay yourself from the corporation.
Generally speaking there are two primary options: salary or dividends.
There is also a third option which is management fees and is often bandied about as an easier alternative.
Should You Pay Yourself a Salary or Dividend? 7 Considerations For Small Business Owners
While incorporation has many benefits for small business owners, it does introduce additional complexities that are not faced by registered businesses. Unincorporated business owners are essentially taxed on their net business income, which allows for more time to devote to tax planning and how to spend all of your richly deserved profits. Incorporated business owners, on the other hand, cannot just withdraw cash from their businesses as the need or whim arises. There needs to be a formalized structure in place which usually takes the form of either salary or dividends. Either type of remuneration has tax and other implications that need to be considered before making a decision.
How to Pay Dividends: Completing the T5 Slip and Summary
If you are the owner of a Canadian corporation, you can choose to pay yourself (and other shareholders) dividends instead of a salary. Alternatively, some shareholders also take dividends in addition to a salary depending on their tax planning strategy. If you do decide to pay yourself dividends, it is important to ensure that you prepare the proper documentation for Revenue Canada (CRA) and if you live in Quebec, Revenue Quebec (MRQ) since this must be reported as investment income on your personal tax return in the calendar year in which the dividends are paid. If you are paying dividends to a Canadian shareholder, you must issue a T5 slip while non resident shareholders receive an NR4 slip. The T5 dividend slips are generally due by February 28th of the calendar year following the year in which the dividend was paid Although no income taxes are due at the time of filing the T5 slips with the government, interest and penalties apply for late filing . The process of submitting preparing and submitting the dividend declarations and the documents that need to be filled out and returned to the CRA and MRQ are discussed below:
4 Alternatives for Preparing Your Small Business Payroll
Paying salaries to employees (or yourself) requires more than just determining the gross amount to be paid. The Canada Revenue Agency and Revenue Quebec require that employers calculate a variety of taxes on the salaries paid, remit them to the federal and provincial governments and prepare annual reports demonstrating that the calculations are correct and all salary deductions have been paid. This can be a lot of work for business owners whose time is better spent generating sales and building their businesses. Luckily there are many options for small business owners to calculate their payroll and salary remittances, many of which simplify the process:
Consider These Factors When Deciding Whether to Take Salary or Dividends
One of the most common questions I get asked by corporate business owners is whether to take salary or dividends and how much tax can be saved by taking only dividends. The answer unfortunately, like most issues relating to tax, is that it depends on your circumstances. The concept of integration in the Canadian tax system theoretically strives to make taxes payable the same whether you take salary or dividends or a combination of both. In reality, there is always a difference as everyone’s tax situation is distinct.