There are a few ways an owner can draw wages or withdraw money from the incorporation, and these methods can be combined. The tax consequences vary for personal and corporate taxes depending on the method chosen.

The best option of course is to repay any loans made to the company. This is a tax free way of withdrawing money, as a loan repayment is not considered taxable income. A shareholder often makes transactions where the company would owe them for personal purchases. Charging the company for kilometers driven on a personal vehicle as well as cash purchases and cash influxes, are a few ways a shareholder can accrue credit in the shareholder account to later be paid back tax free.

The next best way to take money out of your company is to be set up on payroll, as an employee would be. Source deductions are remitted to the government and a T-4 is issued at the end of the year. The personal tax is already deducted at source so at tax time there are no tax implications for the owner. The corporation deducts the wages and payroll expenses paid and there are no tax implications for the corporation other than being current on source deduction remittances. This of course is dependant on cash flow and for a new company, this may not be convenient and not keeping current could result in penalties and interest.

A less popular way of drawing a wage is through an Employee Profit Sharing Trust (EPST). The company must register the EPST through a lawyer and pay a yearly fee to keep the trust active. The wages drawn are not subject to payroll taxes, they are considered a trust withdrawal and fully deductible. At the end of the year, the shareholder (or employee) is issued a T4PS to file with their personal taxes. Since no tax is taken at source, the filer is responsible for the taxes on their personal return, resulting in a balance due. This method however, is not subject to CPP and does not contribute to RRSP room. This may be an issue - taking all of the wages this way may not be the best way in regards to a personal financial plan.

Shareholders can also take a wage by declaring dividends. No expense is taken to use against income so the company pays taxes on the profit made in that fiscal year. If there is profit, this would transfer to the retained earnings account for the new year and the owner may draw dividends out against the retained earnings. A T-5 is issued to the owner to claim on their personal taxes. Again, this type of income does not contribute the CPP earnings or contribute to RRSP room. The dividends do not have tax taken at source and are taxed differently on a personal tax return.

It may be advisable to take wages from the business in one of these ways or it may be better to use a combination of these methods.

One way that wages have been taken for years is as a Management Fee. This is usually deducted in the corporation as an expense; as a subcontractor would be. No payroll taxes are taken at source as the shareholder would claim this income as business income on their personal taxes, and pay the income tax and both portions of the CPP then. This has been a popular method of drawing wages for the shareholder by many accountants, especially in a single owner company - up until this point.

Revenue Canada put together a “project” in January 2005 and after three months of investigating, they have decided to refuse to accept this way of drawing money from your company. Even though the taxes and CPP are paid at the same rate as it would be as an employee, the payable date on these funds is April 30th. If wages are taken through payroll and a T-4 is issued, the T-4 summary and the payroll taxes are payable on February 28th.

Revenue Canada is currently reviewing all corporate tax returns showing Management Fees and comparing it to the shareholders tax return, looking for Business Income or Other Income claimed. Revenue Canada has reassessed in the tens of thousands of corporate income tax returns back to 2001, in order to collect penalties and interest on T-4s not filed and paid in full by February 28th of the year due.

So, when making a tax plan both personally and corporately, take into consideration all of the ways to draw money from your business and the tax implications of each method.    

Debbie Patterson is the owner of Odessey Business Services & offers services to consult & educate in the growth & understanding of your business. Visit www.odesseybusiness.com    for details on the services that suit your company’s growth stage best. Or call directly at 403. 816.5098.

 Publishers Message    Business Directory   Articles   Local Events    Subscribing
Rising Women Business Forum   Call For Writers   Advertising    Distribution
****
Rising Women Magazine   Calgary, Alberta  Canada
403 228-7874   media@risingwomen.com