Payroll or Dividends ??

[canada_hdk21]

Afternoon all,

just wondering if anyone has some friendly advice with having your own INC company, I am contracting myself out and plan to have no employees but can't seem to decide if I should pay myself via payroll, dividends or a bit of both.

So far I am thinking I pay myself the min through payroll and max out CPP. In 2019 to max out for CPP is 56K ish .. and then take out dividends as i see fit.

I do have an accountant but she has said "i can't tell you what to do only show you your options"

Thought maybe some of you might have some advice in this area of things.

Regards!!!

[mrkajz44]

This is a tricky question since lots of factors come into play. I can give general thoughts:

1) Tax rates are set up such that you should be indifferent between dividends and salary. However, personal factors usually make one better than the other (marginal tax rates, RRSP room, CPP contributions, etc.)

2) There are lots of people who call themselves contractors, but only work for one company and are considered an "incorporated employee". If this applies to you, almost all the benefits of a corporation are not available to you and you have to take money out as salary only

Best advice is to get professional help - if your accountant doesn't want to help you make a decision, then find a new one. Locke does personal tax work, so maybe hit him up and see if he can offer his services.

[Ozy_Flame]

Based on your situation, I wouldn't do all dividends. That leaves you wide open to be dinged down the line, especially if the government sees you as a "Personal Service" Business.

it sounds like you may be contracting on site to a client? If so, if you walk like an employee, talk like an employee and look like an employee - you might want to pay yourself like an employee (payroll).

You need to talk to an accountant for this, it really depends on your situation.

[jtfrogger]

Originally Posted by mrkajz44

Best advice is to get professional help - if your accountant doesn't want to help you make a decision, then find a new one.

I agree with this wholeheartedly.

I let my accountant do the allocation. He explains to me why he does it a certain way. It sometimes changes slightly based on changes to the tax rules.

[DoubleF]

Dividends are supposed to go through a serious change soon and I don't seem to recall much commentary that made it sound favorable. Although, I do think the rules are more targeting income sprinkling.

But as others have already said, be careful to determine whether you are a "PSB" or an incorporated business.

Also get an accountant who will actually help if your current one isn't being helpful. She's not wrong that she can only show you options and can't make the decision for you, but if she's not explaining the options to you to help you make the decision and just talking about stuff at a surface general level, I agree with others, find a new accountant.


And I don't know much about the process, but you should about the regular vs quick method of filing GST. Depending on your situation and whether you qualify, one method over the other could save you quite a bit each year in taxes. But you have to set it up at the beginning I believe. You can't change back and forth later.

[puckedoff]

If you're accountant is so unhelpful that you are posing your question to internet strangers, it is time to find a new accountant.

[Handsome B. Wonderful]

Originally Posted by canada_hdk21

I do have an accountant but she has said "i can't tell you what to do only show you your options"

Like everyone else said, time for a new accountant. I pay mine to determine these things for me.

[DJones]

Don't max out CPP! Terrible return. I can't believe your accountant didn't tell you to give your head a shake.

Pay yourself like $15,000 in wages and pay the minimum CPP that you can to get credit for the year. The key is to trick the formula into thinking your poor, the return skyrockets.

Otherwise, there are other deductions that are only useful against Earned income, and depending on your savings strategy, RRSP limits may be important. Very situational though.

Also it is important to learn about shareholder loans, and what you can and cannot do.

[redforever]

Make sure that if you pay yourself salary and it is from the company that you own, that you get an exemption from paying into EI. You are not at arms length and will never be able to receive EI.

[cSpooge]

Originally Posted by redforever

Make sure that if you pay yourself salary and it is from the company that you own, that you get an exemption from paying into EI. You are not at arms length and will never be able to receive EI.

This is no longer true. He could elect to pay EI and then be able to receive it.

[FurnaceFace]

Talk to Locke. He has a lot of good info and has many independent contractor clients.

My view is there is no right answer and it’s dependent on what you want or what your goals are. I do what you have described in your post but I know fellow contractors who have just done dividends or do shareholder loans.

[Locke]

Originally Posted by cSpooge

This is no longer true. He could elect to pay EI and then be able to receive it.

As far as independent contractors go, and I'm far from an expert on EI as I've never received it, but I believe that the Voluntary EI program exists for contractors for Maternity Leave only.

Originally Posted by FurnaceFace

Talk to Locke. He has a lot of good info and has many independent contractor clients.

My view is there is no right answer and it’s dependent on what you want or what your goals are. I do what you have described in your post but I know fellow contractors who have just done dividends or do shareholder loans.

This is basically the best answer. You can pay yourself in a multitude of ways and being incorporated allows you to determine what the best mix is, or no mix, for you and your goals.

But these options are also altered by things such as being a potential PSB, where you are in your life, how much you've paid into CPP and whether you want to continue or not, income levels, family scenarios, etc.

So my answer is this: There is an answer, but there is no 'one right' answer and it depends upon a myriad of factors that are unique to you and your scenario.

But theres lots of good advice in this thread. Lots of accountants and contractors on CP.

[canada_hdk21]

Well certainly a lot to take in already ... I've setup an appointment next week with my accountant to go over the pros and cons of each situation based on my needs.

Didn't think there would be one right answer or not but figured possibly some of you might have some "best practices" or lessons learned examples. Some of the factors I am considering are;

- what tax bracket do I want to fall into ( 46K - 95K is around 22% and anything higher is 30%+ )
- because of the size of my company IE: yes I am working for 1 direct company I don't benefit from a lot of the write offs but I can expense about 15% of entertainment of my Salary without drawing too much attention and about 18% of my house as I use the den as an office
- how much I plan to contribute to RRSP can help as well
- and I am choosing to MAX out my CPP so that come retirement I have some sort of back up plan should I fail miserably at saving any money


So far after input from this thread and others source I am going to stay in the 20% tax bracket, still contribute to CPP and pay myself on payroll and keep the majority of my money in the company.

[DJones]

Originally Posted by canada_hdk21

Well certainly a lot to take in already ... I've setup an appointment next week with my accountant to go over the pros and cons of each situation based on my needs.

Didn't think there would be one right answer or not but figured possibly some of you might have some "best practices" or lessons learned examples. Some of the factors I am considering are;

- what tax bracket do I want to fall into ( 46K - 95K is around 22% and anything higher is 30%+ )
- because of the size of my company IE: yes I am working for 1 direct company I don't benefit from a lot of the write offs but I can expense about 15% of entertainment of my Salary without drawing too much attention and about 18% of my house as I use the den as an office
- how much I plan to contribute to RRSP can help as well
- and I am choosing to MAX out my CPP so that come retirement I have some sort of back up plan should I fail miserably at saving any money


So far after input from this thread and others source I am going to stay in the 20% tax bracket, still contribute to CPP and pay myself on payroll and keep the majority of my money in the company.

If you're worried about savings there are private pension plans that lock in your money. Put the same amount you would into CPP and you'll be way ahead by the time you retire. Run some numbers on CPP ROE. Unless you live to 100 it's a bad bet. And if you don't live till then at least your wife and kids will get some benefit.

[Slava]

Originally Posted by DJones

If you're worried about savings there are private pension plans that lock in your money. Put the same amount you would into CPP and you'll be way ahead by the time you retire. Run some numbers on CPP ROE. Unless you live to 100 it's a bad bet. And if you don't live till then at least your wife and kids will get some benefit.

Right and those plans can be written off as an expense for the business as well. There are some drawbacks and it's not for everyone in every scenario, but it's a fantastic tool.

[Muffins]

Originally Posted by canada_hdk21

So far after input from this thread and others source I am going to stay in the 20% tax bracket, still contribute to CPP and pay myself on payroll and keep the majority of my money in the company.

Just so you know, your company will get taxed on that.

[DJones]

Originally Posted by Muffins

Just so you know, your company will get taxed on that.

He'll get a dividend credit for that though. Evens out over the long term.

[canada_hdk21]

Originally Posted by DJones

And if you don't live till then at least your wife and kids will get some benefit.

**cough** .. I am a single female with no kids

[DJones]

Originally Posted by canada_hdk21

**cough** .. I am a single female with no kids

Sorry, bit presumptuous haha

We're looking a longtime in the future though. Give it to charity, still better than the feds.

[Slava]

I realize that this is going to come off somewhat self-serving, and my apologies, but the truth is you need a good accountant and a financial advisor. Having a good advisor will mean that they can look at what you’re doing (which is often dictated by the accountant, or at least is in concert with the accountant) and help you set things up efficiently to move forward. For example, you’re talking about keeping a bunch of money in your corporation, which is good, but a good advisor can help you in terms of how to keep it and structure it so that it’s tax efficient, and at the same time not just getting you a bank account rate of return. They can also help you with ways to have the business at for things for the employee (ie. you!) so that you get the same kinds of benefits as people who work for the large corporations. It’s not the kind of advice someone can give you in a thread though because they need to know what you’re doing now and of course where you’re trying to get to and then can figure things from there.