Start Planning for Year-End

As a business owner, you should not wait until the year-end to start planning for the most optimal and tax effective compensation strategy. At this point in the year, with only 3 months to go before the end of the personal income tax year, you should be in a good position to estimate what your business’ income and profits will look like, and how you want to pay them out in in the most tax effective way.

Forms of remuneration for the owner-manager

There are various ways that the owner-manager can receive remuneration. The most common form of paying yourself as an owner-manager is by way of salary or dividends.
Other forms of remuneration may include:

Management fees
Borrowing funds from the corporation
Automobile use

There are various things to consider when making the decision for the optimal compensation mix. In general, if the owner-manager does not need the money, it is usually best to leave it in the corporation and allow it to grow subject to tax at corporate tax rates, which are less than personal tax rates.

However, if you are looking to pay it out, or have been withdrawing funds throughout the year, you need to decide how the withdrawals will be classified. It is important to make this decision before the year end because there are reporting and filing deadlines that need to be met, depending on the classification. If you classify your withdrawals as salaries, management fees, bonuses paid, for example, you need to remit source deductions by the due date, and file T4 slips. For dividends, no source deductions are required, but a T5 information return will need to be filed by the due date.

Other factors to consider when deciding what form of remuneration to receive, include:

your need to maximize your RRSP contribution and deduction room
your ability to claim your remaining capital gains exemption
other tax deferral methods such as declaring and accruing a bonus

Putting together the most optimal and tax effective compensation mix can be a very complex exercise, and should always be done with consultation with your accountant to avoid suffering any negative tax consequences. Trying to implement retroactive tax planning is both ineffective and frequently impossible, so seek professional advice before making these decisions