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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.
- Elect to pay out tax-free “capital dividend account” dividends.
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Consider paying dividends to obtain a refund of “refundable dividend tax on hand”.
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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.
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Dividends, as opposed to salaries, will reduce an individual’s cumulative net
investment loss balance thereby providing greater access to the capital gain exemption.
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Retaining income in the corporation may affect provincial
and federal capital tax and certain provincial clawbacks.
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Excessive personal income affects receipts subject to
clawbacks, such as old age security, the
age credit, child tax benefits, GST credits, etcetera.
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Salary payments require source deductions to be remitted to
Canada Revenue Agency (CRA) on a timely basis.
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Individuals that wish to contribute to the Canada Pension Plan or a
Registered Retirement Savings Plan may require a salary to create “earned income”.
- Salaries paid to family members must be reasonable.
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Some provinces have “payroll taxes” thereby increasing the costs of paying salaries versus dividends.
