Nancy Graham August 10, 2017 Business Wealth Personal Wealth Paying Yourself as a Business Owner Today’s “No Dumb Question” is of interest to every business owner as one of those “good problems to have”: What’s the best way to pay yourself out of your thriving business? I wish I could recommend the same, one-size-fits-all strategy for everyone. In reality, you’ve got three ways to be paid: salary, dividends or both. The choice depends on how you’d like to balance an interrelated trio: Getting paid today, saving toward retirement, and maintaining the value of your business. I see the plethora of possibilities as another “good problem” to have. True, it makes things more complicated. But having multiple choices also gives you more flexibility. So let’s look at some of the things to think through as you decide how you’re going to pay yourself what you’re worth. Speaking from personal experience, anyone who’s raised three children to adulthood knows that sometimes there’s just no pleasing all of your darling offspring, all at the same time. The same could be said for the multiple interests you juggle when you own your own business. Whether you’re the proprietor of a modest shop or a multimillion dollar conglomerate, deciding how best to pay yourself can be like a three-ring circus. So, how should I pay myself? First, you must decide whether to take your pay as a salary, a dividend or both. The choice matters, because it impacts your second set of decisions: How will you tax-efficiently save for retirement? Both of these factors also impact your third ball in the air: maintaining the value of your business for when you decide to sell or transfer it to new ownership. While the money you draw out of your business is samey-samey to you, not all of your income is created equal in the eyes of several government agencies. When you receive a salary, a portion of it is automatically paid into the Canadian Pension Plan and, depending on your circumstances, you may also be able to contribute another portion of it to a tax-favored Registered Retirement Savings Plan. Plus your business receives a tax deduction for salaries or bonuses. None of these things occur if you instead pay yourself in company dividends: No CPP stake, no RRSP contribution opportunity, no deduction on your corporate return. But … there also are potential advantages to dividend payouts. On your personal tax return, dividends are taxed at lower rates, compared to your salary, reflecting that your company has already paid some tax. Also you are not required to contribute to CPP – employer and employee shares. So there’s all of that and more to think through. Your corporate earnings also factor in. If your business is hovering around $500,000 in annual earnings, you may favor salaries or bonuses. This can help you to continue qualifying for various small business incentives. Your ideal payout choices may shift again as you approach your personal retirement goals. For example, if you’re doing well without it, you may want to minimize the contributions you’re making into the CPP – as both an employer and an employee, I might note. Before we wrap, there’s one more thing I want to mention: Are you making best use of your Lifetime Capital Gains Exemption? “My what?” you may ask. Depending on how you’ve structured things, this may be an important tax-savings tool for you when the time comes to sell your business. There’s a catch, though. If you don’t think about it until you need it, it’s often too late to make best use of it. That’s why “What’s a Lifetime Capital Gains Exemption?” is the theme for my next “No Dumb Question.” Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
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