As many professionals are able to incorporate their professional service activities based on guidelines from their regulatory bodies, it has opened the door to take advantage of remuneration strategies on how to get money into the professional’s hands through their corporations. This article will focus on the first $500,000 of income to a professional (there are a separate set of considerations for income in excess of this amount).
The following are the three most common strategies utilized by professionals for remunerating themselves through their professional corporations:
Payment of salaries to generate maximum RRSP contribution room
This strategy is to pay salaries to the professional to maximize their Registered Retirement Savings Plan (RRSP) contributions. This is the main benefit of this strategy in that you generate the ability to fund your RRSP to its maximum contribution limit. On the downside, there are corporate Canada Pension Plan (CPP) costs, and RRSPs have restrictions on how much you can contribute along with how and when you are able to withdraw the funds and all withdrawals are taxable.
Payment of salaries to generate maximum CPP contribution
Often, professionals choose to use their professional corporation as their retirement vehicle as opposed to RRSPs. By leaving money in the corporation and investing it there, they remove the restrictions of maximum contributions allowed to a RRSP and the withdrawal requirements put in place by CRA on RRSPs. The money is taxed at the lower corporate tax rate, so you defer tax by not withdrawing it personally. This compensates for not deducting RRSP contributions on your personal return. However, Professionals often want to continue to participate in the CPP program to ensure they can participate in CPP benefits upon retirement and preserve the disability pension if required. For this strategy, the professional takes a wage of approximately $50,000, with the related employee and employer portion of CPP being remitted, and takes the remainder of his or her compensation in the form of dividends.
Payment of strictly dividends
This is the strategy for individuals who do not want to participate in RRSPs or CPP, and want to utilize their corporation as their retirement funding vehicle. Starting in 2014, the corporate tax rates between salaries and dividends are more integrated, so there is less tax savings for dividends. However, this strategy can still be utilized to avoid employer contribution costs based on the professional’s participation in CPP and results in less of an administrative burden associated with payroll remittance filings.
Payments to Family Members
Professionals often want to pay money to family members as a way to split income and utilize lower effective personal tax rates of those family members. Depending on the nature of the corporation and the attributes of its share capital, there may be opportunities to accomplish this objective. While salaries paid have to be reasonable to qualify for tax deductions, dividends are not subject to the same restriction.
Although this article aims to outline various strategies available to professionals and their corporations there are always other factors that need to be considered when determining a final strategy. It is important to discuss your specific situation with your professional advisor to ensure all factors have been considered in the final strategy. If you have any specific questions or require more information, please feel free to contact a DJB professional.
Article written by: Andrew Jubenville, CPA, CA