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.
Consider paying dividends to obtain a refund of “refundable dividend tax on hand”.
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.
Dividends, as opposed to salaries, will reduce an individualís cumulative net
investment loss balance thereby providing greater access to the capital gain exemption.
Retaining income in the corporation may affect provincial
and federal capital tax and certain provincial clawbacks.
Excessive personal income affects receipts subject to
clawbacks, such as old age security, the
age credit, child tax benefits, GST credits, etcetera.
Salary payments require source deductions to be remitted to
Canada Revenue Agency (CRA) on a timely basis.
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.
Some provinces have “payroll taxes” thereby increasing the costs of paying salaries versus dividends.