The Money Scope Podcast
Episode 12: Paying Yourself as a Canadian Business Owner
Podcast summary created with Snipd AI
Quick takeaways
- Optimizing tax benefits by understanding salary vs dividends in a corporation setting.
- Exploring tax integration with active business income in different Canadian provinces.
- Navigating broken tax integration anomalies in provincial tax systems for efficient tax management.
- Customizing tax strategies based on individual circumstances for optimal tax efficiency.
- Considering future tax planning and navigating tax laws for proactive financial decisions.
- Implementing income smoothing and income splitting strategies for efficient cash flow and tax planning in a corporation.
Deep dives
Investing Using a Corporation and Tax Advantages
The podcast discusses how utilizing a corporation for investing can offer tax advantages. It explains how a corporation allows for investing using pre-personal tax dollars, potentially resulting in lower personal tax rates in the future. The setup promotes reinvestment within small business corporations to aid in business growth. Although recent rule changes aim to discourage passive investment accumulation within corporations, the overall strategy focuses on optimizing tax benefits.
Compensation Strategies Within a Corporation
The episode delves into the intricacies of compensating oneself from a corporation and the impact on personal and corporate taxes. Using an analogy of income flowing through a dam, the discussion emphasizes how leveraging a corporation can regulate personal income distribution, enabling efficient tax management by adjusting salary and dividends. Proper compensation strategies facilitate control over tax brackets and influence future financial planning options such as RRSP accounts.
The Concept of Tax Integration and Active Business Income
The podcast explores the concept of tax integration concerning active business income in various Canadian provinces. Detailed analyses reveal how tax rates differ for eligible and non-eligible dividends, showing instances where salary or dividends could be more tax-efficient based on the specific province and individual income levels. Factors like the small business deduction threshold and provincial tax rates significantly influence tax integration outcomes.
Implications of Broken Tax Integration and Provincial Variances
The episode sheds light on instances of broken tax integration in specific provincial tax systems, leading to anomalies favoring or penalizing corporate owners due to discrepancies between federal and provincial tax treatments. Detailed examples, such as those in Saskatchewan and New Brunswick, highlight how tax codes can create unexpected advantages or challenges within different income ranges and provincial contexts, urging careful consideration of individual tax situations.
Considerations for Tax Efficiency and Entitlements
The episode emphasizes the significance of understanding tax efficiency and benefit entitlements when choosing between salary and dividends in a corporate setting. Factors like the impact on income-tested benefits, grossed-up taxable income, and enhanced dividend tax credits are discussed to highlight how personal financial decisions can affect overall tax liability, offering insights for optimizing tax strategies based on individual circumstances.
Implications of Tax Integration Anomalies and Province-Specific Tax Policies
The episode discusses how anomalies in tax integration and variations in province-specific tax policies can impact tax efficiency for corporate owners. Analyses of cases in Saskatchewan, Ontario, New Brunswick, Quebec, and Newfoundland reveal instances where tax breaks, changes in small business deduction thresholds, and provincial tax rate differences create opportunities for tax optimization or challenges in managing corporate income and dividends.
Managing Tax Integration Breaks and Tax Planning Strategies
The episode highlights the complexities of managing tax integration breaks and utilizing tax planning strategies to navigate the nuances of corporate taxation. Insights on broken tax integration, the impact on personal and corporate taxes, and potential tax optimization approaches underscore the importance of seeking professional advice and tailoring financial decisions according to individual tax contexts for efficient tax management.
Future Tax Planning and Strategic Considerations
Addressing future tax planning and strategic considerations, the episode emphasizes the dynamic nature of tax laws, changing tax rates, and potential implications on tax efficiency in varying income brackets. Discussions on investments, RRSP contributions, corporate dividends, and tax integrations underscore the need for proactive tax planning, informed decision-making, and awareness of provincial tax nuances for optimizing tax strategies over time.
Income Smoothing for Cash Flow Management
Managing cash flow efficiently through a corporation involves the concept of income smoothing. This strategy helps decrease the impact of the progressive personal tax system by distributing high and low-income years to keep you in lower tax brackets. Planning for big expenses and communicating with professionals is crucial for effective cash flow management.
Income Splitting with Salary and Dividends
Income splitting using a corporation allows for distribution of income among family members to lower the overall tax burden. This can be done through salary payments, which must be at a market rate, or dividends, which face restrictions under the TOSI rules to prevent excessive splitting. However, exemptions exist for specific cases like active shareholder involvement or age over 65.
Practical Implications of Salary and Dividends
Choosing between salary and dividends has implications on tax integration, RRSP or IPP room creation, and aligning with tax credits. While salary incurs CPP contributions, which some avoid due to misconceptions, CPP can offer a valuable defined benefit pension with survivor benefits. Dividends play a significant role in maintaining tax efficiency for corporate investments by releasing refundable taxes.
Future Explorations on Optimal Compensation
The debate between salary and dividends for compensation is dynamic and influenced by various factors like business growth, provincial regulations, and dividend-splitting abilities. Future episodes will delve deeper into achieving the right mix of salary and dividends to maximize compensation benefits based on individual circumstances.
Whether you’re self-employed or you own a small business, there are many nuances to how you can pay yourself from your business. Our episode today hones in on how we pay ourselves personally from a corporation (along with other key employees, including spouses) and the many intricacies you need to understand when making decisions about this process. While today’s episode may be our most complex and ambitious one to date, we hope it will serve as a useful resource for helping you get the most out of your business. Tuning in, you’ll learn about the benefits and drawbacks of paying yourself with a salary versus dividends, how to optimize your meetings with accountants and financial planners, and much more. We get into key topics such as employee insurance (EI) in different contexts, the benefits of the Canada Pension Plan (CPP), why you need to put together an income smoothing plan, and how to use shareholder loans without consequential missteps. The final portion of our show is dedicated to income splitting, the best ways to go about it, and how to make sure you adhere to Canadian Revenue Agency (CRA) requirements. Today’s episode covers a lot of ground and serves as a useful reference for listeners to return to. Join us today for this expansive conversation and arm yourself with the knowledge you need to get the most out of your corporation!
Key Points From This Episode:
(0:02:42) Important disclaimers and exceptions concerning today’s topics.
(0:05:37) Common questions on taxation of active business income, personal income, the nuances of tax integration, business expenses, exemptions, and deductibles.
(0:19:32) A breakdown of how net active income is taxed, what to do with retained earnings, and navigating the dividend gross-up system.
(0:28:57) Planning for retirement, asset allocation, and determining your time horizon.
(0:34:44) An overview of General Rate Income Pool (GRIP) as a notional account for tax tracking purposes and an example of how GRIP works with active income.
(0:38:03) Looking at tax rates and tax integration as you move through different tax brackets and how rules vary between various jurisdictions in Canada.
(0:56:02) Unpacking what you need to know when it comes to paying yourself a salary and paying employees (including spouses).
(01:01:08) Employee Insurance (EI) in different contexts, the distinctions between arm’s length and non-arm’s length employees, and navigating Canada Pension Plan (CPP) payments.
(01:05:18) The many benefits of the Canada Pension Plan (CPP), and why the reservations people have due to it being government-mandated is not unhelpful in this instance.
(01:08:20) Key insights on the Canada employment tax credit when considering the salary versus dividend debate, and how salaries can create other financial planning benefits.
(01:16:38) Putting together an income smoothing plan, how to keep yourself in a lower tax bracket over your lifetime, and how to work with a financial planner.
(01:25:17) A Breakdown of shareholder loans, how they work, the tax risks involved, and the best ways to use them.
(01:27:32) Other ways to get money out of your corporation efficiently, like with your capital dividend account (CDA), and optimal ways to use your CDA.
(01:34:25) The concept of income splitting, its benefits, the best strategies for going about this, and how to adhere to Canadian Revenue Agency (CRA) requirements.
(01:45:17) A recap of what we covered today and what we have coming up next time.
Links From Today’s Episode:
CRA Interpret Bulletins - https://www.canada.ca/en/revenue-agency/services/forms-publications/current-income-tax-interpretation-bulletins.html
Dr. Mark Soth’s Calculators — https://www.looniedoctor.ca/canadian-financial-calculators/
Dr. Mark Soth (The Loonie Doctor) — https://www.looniedoctor.ca/
Dr. Mark on X — https://twitter.com/LoonieDoctor
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
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