Corporate business owners have great flexibility in making decisions about their remuneration (or compensation) from a private company. This flexibility also extends to other types of businesses, such as incorporated professionals and business consultants. It’s important that decisions about remuneration be discussed frequently and reviewed annually to ensure they are meeting the owner’s objectives.
- In general, if a corporate owner-manager does not need personal funds for spending, earnings should be left in the corporation to generate additional income and defer the personal tax until a later date when personal funds are needed. Deferring personal tax allows you to reinvest the corporate earnings and earn a rate of return on the personal tax you would have otherwise paid if you had extracted the funds from the business.
- Even if funds are not required for personal consumption, business owners may want enough salary to create sufficient earned income to maximize their RRSP contribution and use tax savings associated with graduated income tax rates.
- In order to contribute the maximum RRSP amount for 2019, you will need a certain level of earned income in 2018. One method to generate earned income is to receive a salary in the year. Note, salary must be earned and received in the calendar year. Receipt of a salary would also allow the business owner to maximize CPP pensionable earnings for the year.
- If there is a plan to pay salary, bonuses can be accrued and deducted by the business in given year, but not included in the business owner’s personal income until paid. To be deductible to a corporation, the accrued bonus must be paid to the employee within 179 days after the company’s year end, permitting a deferral of tax on salaries of up to six months.
- Plan to compensation family members working for the company.
- Shareholder “debit” loans must be repaid within one year after the end of the year in which the loan was made, or else the loan will be included in the business owner’s income in the year funds were withdrawn.
- Some owners prefer to limit their personal income and retain the excess in their companies as a retirement vehicle. Many provinces have an overall “tax cost” to distributing business profits in the form of a dividend, meaning the total corporate and personal tax paid on fully distributed business earnings exceeds that province’s personal tax rate.
New this year, the government’s recent proposals on income sprinkling and passive income need to be considered. The new legislation proposes to fundamentally overhaul the system of taxation for private companies, as well as their shareholders and family members.
More specifically, two new proposals introduced in the 2018 federal budget will limit the deferral “advantages” from holding passive assets in a CCPC, applicable for taxation years that begin after 2018. The first measure will restrict access to the SBD (small business deduction) for CCPCs who earn more than $50K of passive investment income in a taxation year. The second measure amends the existing refundable tax regime for CCPC to restrict the refund of RDTOH (refundable dividend tax on hand) to only be available in cases where a private corporation pays non-eligible dividends. These rules are effective January 1, 2019 so may affect your 2018 remuneration.