A common discussion I have with farmers who have set up a corporation is how to withdraw cash for personal use.
It is important to establish a strategy when you first incorporate but also to revisit it annually to ensure it is in line with your financial goals.
The big question is should you pay yourself through a wage or a dividend?
I always remind farmers that wages and dividends flow through the company in different ways, but your overall tax bill on the money for personal use is relatively consistent. Keep this in mind when considering the following factors.
Wages are usually paid monthly or bi-weekly, which requires you to make remittances to the government each month for deductions off your wage such as income tax and Canada Pension Plan. This can usually add more administrative work than a dividend.
You must be an owner of the corporation to receive a dividend. This allows you to draw amounts during the year at different times. In comparison to wages, this can result in you having to pay quarterly personal tax installments during the year.
Canada Pension Plan
If wages are paid, both the em-ployer (your corporation) and the employee (you personally) are required to pay into CPP.
You are likely not required to pay into Employment Insurance because you are the owner of the corporation, but you should confirm this with your professional adviser.
You are not required to pay into CPP or EI if you pay a dividend.
The maximum CPP contribution for 2016 is $2,545 for both the corporation and the employee. Therefore, the cost of paying into CPP each year can be up to $5,090, which can be avoided by paying a dividend.
However, you will not receive CPP benefits when you retire if you do not pay into the plan. In 2016, the maximum annual CPP benefit you receive at the age of 65 is $13,116, which is taxable when re-ceived.
Registered Retirement Savings Plan
RRSP room is only created if you pay yourself a wage.
Making RRSP contributions means you are investing money on a tax deferred basis. As a result, a wage can be beneficial if you are saving cash. For many farmers, cash is invested back into the farm, but this is an important consideration to make in a scenario where you are saving cash outside of the farming operation.
On the other side, it is likely beneficial to at least pay out some dividends if you have investments in your company.
Dividends paid out to individual shareholders can result in tax being refunded to your corporation if you have earned investment income.
Both of these payment methods require government filings by Feb. 28 each year. A wage requires a T4 and a dividend a T5.
The strategy you choose to pay yourself depends on your situation. You may also want to consider paying yourself a mixture of wages and dividends to reap the benefits of both choices. It is important to consult with a professional when determining the best way to draw cash for personal use from your corporation.