Video instructions and help with filling out and completing Can Form 8815 Wages

Instructions and Help about Can Form 8815 Wages

Should you take out money in the form of salary or dividend from your company today we will first talk about the pros and cons of the two then I'll walk you to a couple of examples then I will tell you what you should think about before making the final decision and in the end talk about some important for you to consider going forward let's get started with salary first the advantages with salary or the amount declared a salary is deductible to the corporation thus reducing the taxable income you're able to contribute into your autoresponder salary there is an opportunity to splitting income with other family members who are employees of the company to reduce the overall tax liability and you're eligible for full CPP benefits after retirement the disadvantages with Sally are that it is taxed at a higher rate than dividend you have to paint CPP so you have to pay the employee and the entire portion so your cash flow takes a little hit lastly there is admin time spent on payroll and issued defaults as required by the CRA now the advantages with dividend are the three types of dividend non-eligible eligible and capital dividend i will do a separate video on these three types of dividend then there is an opportunity to split income with other shareholders dividends are taxed at a lower rate than salary you don't need to make any CPP deductions or remittances and you can pay yourself a different just by writing a check it's as simple as that the disadvantage with dividends are that they are not deductible to the corporation they are paid from the after-tax profits of the corporation you don't get any room for RSP contribution you're not able to claim certain tax deductions and credits like the childcare expenses or the employment tax credit and you need to spend time updating copra minute books and preparing directors resolution now let's walk you through our first example we have two guys Michael and Chris both the small business owners of the companies with same earnings but Michael will take out a salary whereas chris'll take out dividend we are assuming both companies earn and active business income and are eligible for small business deduction of 15% federally and provincially in Ontario and Chris is taking out a non illegible dividend in the case of Michael his company makes a profit before tax of one hundred thousand dollars and he pays himself a salary of hundred thousand dollars which brings the company's taxable income to zero on the hundred thousand dollars Michael will have personal tax liability of twenty five thousand one hundred and ninety seven dollars on top of that there will be an employee portion in an employer portion of CPP for two thousand five hundred forty four dollars each which brings the total tax liability to thirty thousand two hundred and eighty five dollars on the other hand Chris's company also makes a profit before tax of one hundred thousand dollars remember the dividends are paid from after-tax profit of the corporation so the tax on the profit will be fifteen thousand dollars which brings after-tax profit to eighty-five thousand dollars on the $85,000 dividend Chris's personal tax would be ten thousand nine hundred and eighty-eight dollars when you add the corporate tax and the personal tax the total tax liability comes to twenty five thousand nine hundred and eighty eight dollars as you can see paying dividends lowers the overall tax liability now let's take a look at another example with the same assumption but this time profits before tax are five hundred thousand dollars for both corporation under this scenario as you can see Michael will have a total tax liability of two hundred thirty six thousand six hundred and ninety dollars whereas Chris's total tax liability will be two hundred thirty two thousand two hundred and fifty four dollars again paying dividend is still a better choice now you should ask yourself this question before making a final decision what is your personal financial situation what is your income level what are your cash flow needs what is your corporation's expected income for the year do you have RSP vailable are other personal deductions important to you like child care expenses your age now is your company making more than $500,000 in pocket usually it's better to pay salary to DVC corporate taxable income to $500,000 so you are reading the small business deduction limit is cpp important to you if it is consider paying yourself a salary up to the maximum CPP limit or consider paying salary up to the maximum RSP limit if RSP is important to you remember there are three types of dividends non-eligible eligible and capital dividend and in the end here are some things I want to point out for you guys to consider going forward do you have children over the age of 18 if you do you should consider setting up a family trust and make that issue holder of the operating corporation the trust can pay dividends to the children this way your child pays no or very little tax because of dividend tax credits and personal exemption this is a great way to pass on income to your kids without increasing your own income and it good strategy to put your kids to university in college I hope you guys found this video helpful and if you have any questions please feel beautiful in the comment section below I'm a CPA CA with a passion to help small and medium-sized business owners and entrepreneurs in Canada so please feel free to reach out to me