What’s the best way to pay yourself from your corporation? The right mix of the options depends on your individual tax situation.
Wages
Reasonable wages can be paid to anyone who works for the corporation and are considered a tax deduction to the corporation. Wages to people who own more than 40 percent of the voting shares of the corporation are not eligible for Employment Insurance and no EI deductions are necessary.
Wages require Canada Pension Plan contributions. For 2023, CPP contributions are 5.95 percent for the employer and 5.95 percent for the employee, for a total of 11.9 percent on wages up to $66,600. The total CPP contribution cost for a $66,600 wage is $7,509 in 2023.
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Do you want to pay into CPP? CPP is retirement income for the rest of your life. If you live to 90, the comfort of this inflation-adjusted monthly payment is great. However, if you die young, other than the CPP survivor benefit the CPP contributions are “wasted.”
The break-even age is generally around age 81-84. Some people would rather make their own investing decisions, such as buying farmland, rather than paying into CPP. If you are 65 or older and receiving CPP, you can choose not to pay into CPP on wages.
The corporation will need a Canada Revenue Agency payroll account, typically with monthly payroll remittances. Wages require significant income tax withholdings, which need to be paid to CRA. If payroll remittances are not paid on time, there can be significant penalties. Payroll remittances must agree to the payroll paid, or else CRA will ask for a reconciliation.
Unlike dividends, wages generate Registered Retirement Savings Plan contribution room at 18 percent of the earnings. This allows for tax deferred retirement savings.
Wages make sense if you want to contribute to CPP and invest in RRSPs, which diversifies your retirement savings. For corporations that are paying tax at the high corporate tax rate, there is a small tax savings by paying wages rather than dividends, although the CPP cost outweighs this. Wages are reported on a T4 slip that the corporation files by Feb. 28.
Dividends
Shareholders of corporations can be paid dividends. Many corporations have separate classes of shares that allows payment of different dividend amounts to each shareholder.
In 2018, the Tax on Split Income rules came into effect, limiting the dividends that can be paid to family members not actively engaged in the corporation’s business.
However, for corporations that sell goods, including farm corporations, there is an exemption from the TOSI rules if the shareholder holds more than 10 percent of the votes and value of the corporation, and is older than 25. This exemption allows for dividends to adult children and spouses that aren’t actively engaged in the farming operation.
Dividends are not a deduction to the corporation and are paid out of after-tax funds. At a 10 percent small business deduction tax rate, the corporation will pay $10,000 of corporate tax on $100,000 of income, leaving $90,000 of after-tax funds that can be paid out as dividends. Dividends paid out of income taxed at the small business deduction rate are called non-eligible dividends.
If the corporation pays tax at the high corporate tax rate of 27 percent (23 percent in Alberta), the corporation has a pool from which it can pay eligible dividends. Eligible dividends are subject to a lower personal tax rate compared to non-eligible dividends.
On personal tax returns, there is a dividend tax credit to offset the tax that the corporation paid. The overall tax rates are almost the same compared to wages, even when you add the corporate and personal tax paid.
For most provinces, the overall tax paid on dividends compared to wages is a minimal difference for small business deduction income and one to two percent extra overall tax for the high corporate tax rate eligible dividends.
Dividends do not result in CPP contributions. If you aren’t making CPP contributions, are you saving for retirement elsewhere? Making your yearly Tax-Free Savings Account contribution of $6,500 for 2023 is a tax efficient investment decision.
For shareholders who don’t want the hassle of payroll remittances and don’t want to pay into CPP, dividends are the simplest method of corporate compensation. Dividends are reported on a T5 slip that the corporation files by Feb. 28.
Rent
If a corporation is farming land owned by an individual, the corporation can pay the landowner rent. Land rental is a deduction for the corporation and taxable on the individual’s personal tax return.
If you have personal land debt, charging rent creates personal income to match the interest expense on your personal tax return. Rent does not have CPP deductions or the hassle of payroll remittances. Land rent is subject to GST, you will need to file and pay the GST on your personal GST return and the corporation will get the GST refund.
Where there is a need to withdraw significant amounts from the corporation, you may want a corporate reorganization to access the cheaper capital gain tax rates in lieu of dividends.
Get advice from an accountant before making a decision.
Levi Derksen, CPA, CGA, is a senior manager in the Ag Team at Buckberger Baerg & Partners LLP in Saskatoon.
