Naturally the purpose of almost every business owner is to grow their Company to the point where it can generate a personal income for them for their financial needs and stability. When the Company gets to that point the business owner has to determine if they are going to withdraw their money requirements by way of dividends or wages. They both have tax implications, and it is really important to know what these are before actually following through with the withdrawal of the funds.
This is where it is highly important to utilize the services of a qualified accountant so you can make the right business decisions throughout the year that could have a direct effect on both your business and personal finances.
Every accountant will have their own views as to which method of withdrawing money out of the Company serves the best tax advantages. Some of these professionals believe that just paying the business owner via dividends creates greater tax savings. There are some drawbacks to this aside from the tax implications. If you are receiving dividends rather than a salary then you no longer are able to make contributions to your RRSP, and the same applies for the CPP.
What is extremely important to remember is that dividends should only be taken after tax profits. If your Corporation owes money to the tax department you should not be taking dividends or you could find yourself in difficulties under section 160 of the income tax act.
A lot of business owners hate the thoughts of taking a salary because they know they are going to have to pay the full rate of tax on this in comparison to the tax they would have to pay on the salaries. Although, the salary can be utilized as an expense in the business recordings, which could result in a business tax reduction perhaps.
By working with your accountant and under his advice you may be able to structure the money that is being taken out of your company for your personal needs, by utilizing both salary and dividends. It is important that you discuss your options with this financial expert so you can get the best tax benefits but also keep yourself out of potential problems with the CRA.
If your Company qualifies for the small business tax credit how you handle your withdrawals from the Company can also be affected by this. These are some of the reasons why careful tax planning is so important for your business as it has implications concerning your personal tax obligations and liabilities as well.