Some general guidelines to follow in remunerating the owner of a Canadian- Controlled Private Corporation earning “active business income” include:
1. There are generally two options for paying earnings out of a corporation – salaries and dividends. The best method depends on the applicable provincial tax rates, quantity of personal and corporate income, and whether you can afford to leave earnings in the company.
2. Notification must be made to the shareholders when an “eligible dividend” is paid.
3. Elect to pay out tax-free dividends from the “Capital Dividend Account”.
4. Consider paying taxable dividends to obtain a refund from the “Refundable Dividend Tax on Hand” account.
5. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the tax is paid when cash is withdrawn from the company). The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares where large amounts of capital have accumulated.
6. Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby possibly providing greater access to the capital gain exemption.
7. Excessive personal income may reduce receipts and credits, such as Old Age Security, the age credit, child tax benefits, and GST credits. It may be advantageous to defer receiving Old Age Security receipts (for up to 60 months) if it would otherwise be eroded due to high income levels (greater than $71,592 for 2014).
8. Salary payments require source deductions (such as CPP, EI and payroll taxes) to be remitted to CRA on a timely basis.
9. Individuals that wish to contribute to the CPP or a RRSP may require a salary to create “earned income”. RRSP contribution room increases by 18% of the previous year’s “earned income” up to a yearly prescribed maximum ($24,270 for 2014; $24,930 for 2015).
10. Spouses may jointly elect to have up to 50% of certain pension income reported by the other spouse.
11. If you are providing services to a small number of clients through a corporation (which would otherwise be considered your employer), CRA could classify the Corporation as a Personal Service Business. There are significant negative tax implications of such a classification. In such scenarios, discuss risk and exposure minimization strategies with your professional advisor.
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