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This is the third module in the Canadian Small Business Course. …

This is the third module in the Canadian Small Business Course.

In this course we begin to get into the nitty gritty of running a small business in Canada. Here, we review the different ways that are available to pay yourself as an owner-manager.

After taking this module, you should have a firm understanding on what is entailed in paying yourself with salary, dividends and other means along with how to administer these options.

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  • Add a module on “Funding your Retirement” – keeping retained earnings in the corporation and then paying dividends to family shareholders when its time to retire. Show example of how this would work.Also add some detail about establishing a holding company to bump up the R/E and protect the shareholders from creditors.Look at the NOP presentation on insurance strategies in shareholder agreements, maybe do some more research in this area
  • The answers to these questions are the objectives to this course.They will all be answered as we proceed through the course topics.
  • Show an example of how the partnership account works with an Excel spreadsheet.
  • Consider putting in a diagram of how a corporation is different from a proprietorship
  • Give an example of a company with a large profit after the salaries have been paid to the owner-managers.
  • Show an Excel spreadsheet example of how salaries work (deduction) vs. dividends (paid out of after tax income)

Transcript

  • 1. MODULE 3
    Owner-manager Compensation
  • 2. QUESTIONS
    How am I going to pay myself?
    How can I pay the least amount of taxes?
    Are there any other benefits that I am entitled to being self-employed?
    Is there a way I can split income with family members to save tax?
  • 3. Paying yourself
    Least Taxes
    Benefits
  • 4. PROPRIETORSHIP
    Paying yourself is a simple task: just write yourself a cheque or withdraw cash
    You are paying tax on your “net income” so drawings have no other implications
    You and your business are not separate entities
    If you are making more profit than you need to live, consider incorporation
  • 5. PARTNERSHIP
    Similar to proprietorship
    Will need to keep track of a partnership capital account
    Capital – How much is available to each partner
    Contributions + Net income – drawings
    Should never be in a negative balance
  • 6. CORPORATION
    Separate entity - tax planning necessary
    Ability to defer taxes
    Tax savings down the road possible
    Planning tools and compensation methods not available to proprietors
    Everyone is different so there is no catch-all method
  • 7. MAIN COMPENSATION METHODS
    Pay yourself a salary (payroll)
    Declare dividends
    Draws from the corporation
    No right or wrong answer
    Will depend on your particular situation
    Tax implications are different in all three situations
  • 8. SALARIES & WAGES
    You’ll be setup on a company payroll
    It’s like working for someone else
    Consider the following factors:
    your personal living expenses
    the amount of money that you draw from the corporation
    your personal tax and investment situation
    the overall tax planning strategy applicable to your situation
  • 9. SALARIES & WAGES (Con’t)
    OBJECTIVE
    Keep any money you don’t need for your personal living expenses in the company
    Taxed at a lower tax rate (15 - 18%)
    Withdraw in the future at potentially a lower rate of tax
    Save taxes in the long run
  • 10. DIVIDENDS
    Dividends are different from salary
    Paid out of the after tax profits of the corporation, whereas salaries are paid out before corporate taxes
    Not a deduction for tax purposes
    Salaries are deductible expenses
  • 11. BORROWING OR DRAWING
    Not really a form of compensation
    Borrowing will entail paying the money back or taking the amount into income
    Usually an option upon incorporation when assets transferred into the company
    Repaying back to owners what was originally invested in the corporation
  • 12. LOGISTICS - SALARY
    Determine what to pay yourself
    Open a CRA payroll account under your business number (RP account)
    Determine the deductions (CPP, EI & tax)
    Write yourself a paycheque for the net amount
    On the 15th of the following month, remit your payroll deductions to CRA
  • 13. TAX IMPLICATIONS - SALARY
    File a T4 slip and T4 Summary with the CRA by the last day of February each year
    Your T4 slip will be reported on your annual personal income tax return
    Salaries are eligible for RRSP contribution room (18% of prior year salary)
    Corporation will deduct salary paid plus its portion of the CPP and EI expenses
  • 14. LOGISTICS – DIVIDENDS
    There are no tax remittances for dividends
    Can write yourself a cheque from the company whenever funds needed
    Your accountant will declare dividends and issue a T5 from your company
  • 15. TAX IMPLICATIONS – DIVIDENDS
    Declare dividends on your personal taxes as per your T5 (gross-up and DTC)
    Dividends are not deductible as an expense to the corporation
    Paid out of after tax profits of corporation
    Investment income to you, therefore not eligible for RRSP contribution room
  • 16. TAX IMPLICATIONS – LOANS
    Imputed interest benefit – a taxable benefit for use of company’s money
    Must declare the amount withdrawn as income if it is not paid back
    Must be paid by the end of the following fiscal year
    Can’t be a series of loans and repayments
  • 17. YOUR OBJECTIVES
    Do you want to be collecting Canada Pension Plan benefits when you retire? Are you willing to pay the premiums (both employee and employer) to achieve this?
    Yes I want benefits – Salary
    No, I don’t care about CPP - Dividend
    Do you want to contribute to a Registered Retirement Savings Plan as part of your retirement plan?
    Yes, I want RRSP’s - Salary
    No, I don’t care about RRSP’s – Dividends
  • 18. PAYING FAMILY MEMBERS
    Reasonable for the work they are doing
    What would you pay an unrelated person to do the same work?
    Tax savings could be substantial if done properly
  • 19. PAYING FAMILY - LOGISTICS
    Put family member on payroll and pay them frequently
    Same as any other employee
    Make sure they are actually paid and deposit cheques into their own account
    Properly document hours being worked and ensure pay is reasonable
  • 20. FUNDING CHILD’S EDUCATION
    Lend money necessary for tuition and other costs and expenses
    Include the loan in your child’s income for that year.
    Once the student graduates, have him/her repay the loan back to the corporation as they begin to earn money.
    When they do pay back the loan, deduct the amount of the loan on his/her personal income tax return.
  • 21. ISSUING SHARES TO FAMILY
    Important to setup the corporation right from the start
    Issue different classes of shares to family members and partners/shareholders
    Mr. Smith: Class A shares
    Mrs. Smith: Class B shares
  • 22. ISSUING SHARES (Con’t)
    Reasons for issuing shares:
    Attracting investors into business
    Succession planning
    Rewarding or motivating key employees
    Income splitting
  • 23. PAYING DIVIDENDS
    Distributing profit to the shareholders
    No need to worry about family members actually working in business
    Lucrative especially if no other sources of personal income
    Separate classes provide much greater flexibility to split income
  • 24. SELLING YOUR BUSINESS
    Capital gains exemption if you qualify
    Up to $750,000 of capital gains per shareholder
    Qualify?
    No investment assets in company
    All assets (90%) used in active business
    Owned by a Canadian resident or someone related to them
  • 25. PRIVATE HEALTH SERVICE PLAN
    PHSP converts health, medical and dental expenses into fully deductible business expenses
    Company owned – covers owners, employees and their family members
    Low costs to maintain – 10% of medical claim instead of a monthly premium that must be paid regardless
  • 26. PHSP (Con’t)
    No monthly premiums or deductibles – Not an insurance plan, therefore no monthly premiums
    No medical qualifying – Medical histories of those covered are not a consideration
    Stand alone or supplement existing plan – Can keep existing plan and supplement or top-up those expenses not covered under existing plans
  • 27. EMPLOYEE PROFIT SHARING PLAN
    Problem facing the Canada Pension Plan
    The CPP is a pay-as-you-go system. Every time CPP is withheld and remitting from pay cheques, they go immediately to funding current retired Canadians
    There are currently 5 Canadians working for every 2 that are retired.
    In 25 years due to the aging population, there will only be 2 Canadians working for every 1 retiree
    Thus, CPP premiums will either have to increase or pensions will have to be clawed back or decreased
    You may find that if you are relying on the gov’t to fund your pension, it may not be there
  • 28. EPSP BENEFITS
    Defer personal income taxes – with a September 30 year end, payments do not have to be made until January of the following year. The income does not have to be reported until the following April 30 (a 19 month deferral)
    RRSP eligible – All income paid out under the EPSP is considered “earned income” under the ITA and eligible in determining the RRSP limit
    Income splitting – The payments distributed through an EPSP are not subject to the same reasonability test as salaries. Therefore ideal for income splitting
    Estate planning – you decide your beneficiaries instead of CPP pension reduced to 60% for spouse
  • 29. IPP ADVANTAGES
    Greater deductions – Owner able to make annual tax-sheltered contributions that are greater than those permitted by an RRSP
    Creditor proof - IPPs are creditor proof unlike RRSPs in which the creditor proofing has recently been cast in doubt by the courts
    Deductible contributions – all of the contributions made to the IPP are deductible expenses to the Corp
    Surpluses revert to spouse or estate – Unlike other pension plans, when the member dies the assets revert to the spouse or member’s estate
  • 30. IPP DISADVANTAGES
    Locking-in – plan assets cannot be de-registered as assets must be used to provide a lifetime retirement pension
    Spousal RRSP – an equivalent to spousal RRSPs is not permitted under an IPP. However, the spouse can be enrolled in the IPP
    Contributions are not flexible – The contributions in an IPP are required annually and there are no carry-forward options. In a lower income year, may have to get a business loan to fund the IPP
    Complexity – IPP’s are more complex than RRSPs and the costs to maintain and administer are higher
  • 31. RETIREMENT COMPENSAION ARRANGEMENT (RCA)
    Vehicle to fund retirement and substantially defer taxes
    Becomes extremely beneficial when a corporation’s profits exceed the small business deduction limit of $400,000
    Make a contribution to the RCA as specified by an Actuarial Certificate. This contribution becomes a tax deduction to the corporation
    The income in the RCA is taxed when it is withdrawn from the RCA at retirement. Can be a substantial tax deferral and tax savings since income at retirement will likely be lower, thus a lower tax bracket
  • 32. Canadian Small Business Course
    www.sbclearnbusiness.com
    Visit us online and take the Canadian Small Business Course
  • 33. Canadian Small Business Course
    www.sbclearnbusiness.com
    Or take individual modules such as this presentation:
    Module 1: Forms of business organization
    Module 2: Starting a business step-by-step
    Module 3: Compensation strategies
    Module 4: Tax planning and strategies
    Module 5: Expenses and deductions