Pay Yourself From A Corporation
Now that you’ve incorporated your business, you’re probably wondering what the best way is to pay yourself.
After all, the point of starting your business is to earn money to live from. Taking money out of a corporation is not an issue in itself. However, it’s important to do it properly for CRA purposes.
If the proper steps aren’t followed, you and/or your corporation may end up with a CRA assessment owing some significant taxes and penalties. Following the proper steps at the beginning can prevent any issues with the CRA.
So What Are Your Choices?
3 Most Common Ways to Pay Yourself
1) Regular Payroll
Set yourself up as a regular employee and pay yourself a regular recurring salary, just as you would pay any other employee. Remit your income tax and CPP deductions to the CRA on a regular basis and issue yourself a T4 at year-end. You would then use the T4 and apply it to employment income on your personal income tax return. This method is most common if you are performing regular and recurring duties in the corporation. For example, if you own a construction company and work regularly on job sites.
Taking money out of the corporation as a form of earnings distribution is known as issuing dividends. Dividends are distributions of a corporation’s after-tax earnings to its shareholders. When a company issues dividend payments, it reduces the corporation’s net worth. They’re optional to distribute but are often used to pay shareholders.
Furthermore, dividends are taxable in the hands of the shareholder. However, the tax rate is a much lower than most other sources of income.
3) Shareholder’s Loan
As an owner of a private company, you can remove cash from the business for personal use on an as-needed basis. Removing money this way creates a shareholder’s loan on the balance sheet. However, a note of caution is that taking money from a corporation reduces a company’s net worth and can possibly be seen as net worth manipulation and is usually frowned upon by lenders.
The best approach is to discuss your specific situation with your accountant to find the most tax effective approach to paying yourself from your corporation.