Taking Money from your Corporation Part 3

The 3^rd main way that you will take money from you corporation is through payroll.  Payroll can come in the form of wages, salaries, bonuses, benefits, severance and more.  Payroll may be good if you have a lot of employees, however it is very inefficient if you are a small corporation with little to no employees!  Payroll brings great administrative work, regular $ remitting requirements, and extra CRA filing requirements.  If you are late on a payroll remittance by even a day you could wind up with large penalties, tacking on interest daily.  Having payroll also makes you more prone to a CRA audit as many CRA audits begin with Payroll Trust Exams!  There are many reasons to stay away from payroll, so please do talk to us about your options. 

The key when deciding how to take money from your corporation is understand the rules and follow them.  Now that we’ve outlined Shareholder Loans, Dividends and Payroll in this blog series you have a little understanding of what you can and can’t do.  Here is my tip to you: The best way to take money from your corporation or pay yourself is to simply take draws monthly of what you need to live on (your closed circle) and then when tax planning at the corporation’s year end, we can decide if the draws you took were shareholder loan, dividends, wages or a combination of!  This principal applies the same for taking out a lump sum when necessary.  Keep in mind that if you are married and your spouse is also a shareholder of the corporation, the draws should be in both of your name and put into a joint bank account to give maximum control of income splitting. This is very efficient for tax planning and is legal as you are allowed to borrow/draw money (shareholder loan) from your corporation for up to a year past the corporation’s year end.  In the case of the tip I just gave you, we wouldn’t even need to go past the current corporate year end before we claim it as income, and if there is a reason to not claim it as income this year then we have the option of deferring it.

You now have some great knowledge on the basics of taking money out of your corporation.  Do it wisely and save many headaches and taxes, putting more in your pocket!  For questions, to talk further about this topic and others, or to look at Kustom Design taking care of your corporate accounting and tax needs, don’t hesitate to contact us!

Taking Money from your Corporation Part 1

If you own a corporation (or if you are a shareholder), you must know all the ways to take money from the corporation.  Maybe you work for this corporation full time or part time, or maybe you don’t.  Many people from CRA try to convince you to set up a payroll account and make monthly remittances.  This is definitely not the most efficient way to get money from your corporation.  In fact, it’s one of the least.  What if the corporation owes you money for money you loaned it or for an asset you sold to the corporation?  This is called a shareholder loan.  Shareholder loans must always be considered when taking money from your corporation.  In this blog series, we will understand the basics in 3 categories of taking money from your corporation:

1. Shareholder Loans: Loans to and from your corporation
2. Dividends: Payment of profits of the corporation to the shareholders
3. Payroll: Direct Remuneration for work/services rendered

A Shareholder Loan is a loan that can be both from the shareholder to the corporation and from the corporation to the shareholder. Let’s start by looking at a loan from the shareholder to the corporation to get the basic idea.  If you put start up capital into your corporation, pay for expenses on behalf of the corporation or loan the corporation money the corporation now owes you, the shareholder, the money.  You typically won’t collect interest, but you may want to in specific circumstances. 

Another way that you may have a shareholder loan owing to you from your corporation is if your corporation was in need of certain assets that you own personally, such as a car or computer, and you sold the assets to the corporation.  For any asset that the corporation purchases from you it must purchase the asset at Fair Market Value.  Keep in mind that if you are selling an asset that appreciates (not depreciates) than you may end up with a Capital Gain personally when you sell the asset to the corporation.  (This can also be deferred in certain instances)  When you sell the asset to the corporation, the corporation will either pay you right away for it, or pay you later.  If the corporation pays you later then you simply have a shareholder loan owing to you. 

There is another side to the shareholder loan that we will be discussing on the next blog. Please check back next week! 

Tips on Audit Proofing your Business Part 4

We are now getting close to wrapping up this series and you can see the theme is “be able to prove every expenditure and deposit”  The fact of the matter is that if you can’t prove expenses or deposits, CRA can just deem what they want whether it is true or not!  So you must always keep good back up documentation for every transaction, not just statements but receipts as well!  Keep a good record of all deposits, using a deposit book as well!

In my last blog we began to talk about Employee vs. subcontractors.  Employees must go on payroll and T4’s must be issued for employees.  Subcontractors do not go on the payroll, however a T4A should be filed at the end of the year (due the following February) stating how much was paid to the subcontractor.  

Let’s look a little closer at payroll.  Getting in trouble with payroll can close your business down.  The penalties and interest on late payroll remitting can cripple a business as the rates are so high!  To ensure you stay out of payroll trouble you can simply not have any employees, just subcontractors, or if you do have employees then ensure you always have accurate payroll remittance numbers and make your remittance on time!  You can use the Software produced by CRA, go on their website, or use approved accounting software to calculate your payroll remittances.  Payroll remittances are made on the 15^th of the following month.  So for example September’s payroll remittance is made on the 15^th of October, unless you have other arrangements in writing with CRA.

Subcontractors will remit their own taxes as they have their own business just like you do.  As mentioned they should have a Corporation with a GST number and they should invoice you in exchange for payment.  The invoice is your source document for proof in case you get audited.  In my last blog we listed the main factors CRA looks at to ensure that you have hired a real subcontractor and they are not an employee under the guise of a subcontractor.  If you want to hire and you don’t want employees due to the extra headaches and costs, then speak to us.  Even if it doesn’t look like the subcontractor can meet the criteria, we can help you set things up to ensure they are legitimate contractors.  Go to www.jobworksinc.ca for more info.