CPA Help - Dividend or Salary Decision to Avoid CRA Audit Toronto
Business owners often wonder whether they should pay themselves and family members a salary or dividends. Which is the most tax efficient? Does one risk a CRA Audit Toronto? A Chartered Professional Accountant can help you decide which payment type to choose to save taxes and reduce the risk of a CRA Audit Toronto.
As with most things in life, there is no simple answer that is best for all people at all times. Whether paying dividends or a salary is best, depends on your personal and family circumstances, the corporation’s income source, as well as the legal structure of your business. When a corporation pays you and family members a salary, the corporation can deduct that amount for income tax purpose. But, the corporation, as employer, has to withhold taxes and may have to also have to pay and deduct CPP and EI contributions (as well as other payroll taxes). The amount you receive is fully included in your income and taxed. However, when a corporation pays out dividends, it can’t deduct it form its income. Dividends are after-tax. When a shareholder receives a dividend, the dividend is grossed up and the shareholder receives a dividend tax credit (amount depends on the kind of Dividend). Some dividends are not taxable at all. A Chartered Professional Accountant can calculate which is best for you each year.
Paying your family salary of dividends can result in a CRA Audit Toronto. There are limits on when and how much can be paid out to family members that a Chartered Professional Accountant can help you understand. The tax act is complicated and there are many ways to pay out income from a corporation. Save taxes by asking a Chartered Professional Accountant to optimize your payouts and avoid a CRA Audit Toronto by making sure it is done right.
Disclaimer: Articles are for general information only and do not constitute tax advice. They cannot be relied upon.
Sam Faris is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters and handling disputes with CRA.He also published an article recently in the business magazine: HERE.