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Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning active business income" include:

   Contact us if you need more information.
  1. In general, bonus down active business earnings in excess of the annual business limit - $250,000 for a December 31, 2004 yearend. Leaving corporate active business income over this amount may present a tax deferral but there will likely be an overall higher tax to pay when dividends are finally paid out. Some companies may find it advantageous to have greater than , say, $250,000 of active business income because of other federal and provincial tax incentives.

  2. Elect to pay out tax-free “capital dividend account” dividends.

  3. Consider paying dividends to obtain a refund of “refundable dividend tax on hand”.

  4. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral. The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares.

  5. Dividends, as opposed to salaries, will reduce an individualís cumulative net investment loss balance thereby providing greater access to the capital gain exemption.

  6. Retaining income in the corporation may affect provincial and federal capital tax and certain provincial clawbacks.

  7. Excessive personal income affects receipts subject to clawbacks, such as old age security, the age credit, child tax benefits, GST credits, etcetera.

  8. Salary payments require source deductions to be remitted to Canada Revenue Agency (CRA) on a timely basis.

  9. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create “earned income”.

  10. Salaries paid to family members must be reasonable.

  11. Some provinces have “payroll taxes” thereby increasing the costs of paying salaries versus dividends.

©2009, Doug Nicholson* & Co.,CGA *Professional Corporation
100-1780 Wellington Ave, Winnipeg, Manitoba R3H 1B3.