How Should I Pay Myself?

This is the most common question we get asked at our firm.

After taking the plunge and incorporating a new company, everything is going as planned and the money starts flowing in to your bank account.

It’s exciting, right? Now you ask yourself:

• What happens if I take money out of my business bank account?

• Should I pay myself a salary?

• Is taking a dividend better for my company?

Our answer, is….. it depends! Unfortunately, there is no perfect answer to this question. It really comes down to your goals not just as a business owner, but also your personal financial goals as well. Your personal and business goals should always be discussed in the same conversation as your business plan can have significant tax implications on you personally.

So back to the original question:

If you take money out of your business bank account for personal reasons – don’t fret!

Your accountant will tally up all the withdrawals/transfers and then at the end of the year, with your accountants help, those transfers will be cleared out. Typically, the transfers will flow to your personal taxes in the form of a dividend. More about this below.

But wait! Let’s not forget that you might have pulled money out of your personal bank account to pay for business expenses. These are essentially loans to your company.

• What about meetings with the client at a restaurant?

• Did you use a portion of your house for your home office?

• Did you use your personal vehicle for business related activities?

You would be surprised how many folks don’t take the time to understand how and when a personal expense can be allocated to the business! With your help, we will add up all the personal costs “loaned” to your company and use these costs to reduce the amount of cash pulled out that needs to be moved to your personal tax return.

Now, let’s chat about dividends and how they differ from taking a salary. Note, we talk about these further in our Salary vs Dividends Tip linked here.

Dividend payments are cash that is taken out of your company at your discretion from your after tax dollars. Salaries, on the other hand, are paid to you regularly with a requirement to withhold and remit income taxes to the CRA.

We find that there is a common misunderstanding that a dividend paid from your company to you personally has a personal tax advantage over salaries. In the past, I would say yes, it was advantageous to take a dividend rather than salary as a business owner from an income tax perspective(corporate and personal combined). However, in recent years, the CRA has worked hard to close the dividend tax advantage loopholes and there is no income tax advantage when you compare taking a salary vs dividend. Here are a few(but not all) of the differences on a high level.

• RRSPs – salaries will increase your RRSP contribution room

• CPP – this is not paid if you take a dividend however there are pros and cons here to consider

• Applying for a loan – banks often look for a T4 and most recent pay stub(steady income flow)

• Dividends have cash flow flexibility for tax planning

• Salaries require monthly tax remittance payments by the 15th of the following month

If you’ve read this far – congrats! It’s not an easy topic to get through and easy to get lost in the weeds.

So to summarize, taking money out of your company is easy – you go to the bank machine and withdraw some funds. The key here is that you have sat down with an accountant and discussed the plan before it’s too late and you owe a bunch of tax and possible interest and penalties. Taking money out is easy!

Taking the time to come up with the best plan for you and your company takes a bit of time and energy. That being said, we accountants live and breath this stuff and will do our best to make the planning smooth and painless – that’s our goal!

Feel free to give us a call for any further info or schedule an initial consultation to really get to know your business and see how we can help!