Entrepreneurship & Small Business

How to pay yourself? When Incorporated

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  • Jan 15th, 2020 2:26 pm
[OP]
Sr. Member
Dec 22, 2011
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How to pay yourself? When Incorporated

I recently incorporated.. I took the salary through pay roll. But It appears that was less, so I need more money, How do I pay myself accountwise so it make sense in accounting?

2nd Question: I leased a car before getting incorporated. so how do I claim the payments? Its 90% business use..

Thank you.
:D
13 replies
Member
Jan 18, 2017
244 posts
167 upvotes
Take a dividend. Then draft a T5 for whatever the draw amounts were come Feb 2020.

Is the car owned by the business? If so, there's a schedule. If it's owned personally, you recover the expenses via mileage claims. $0.58/km for the first 5000km, then $0.52/km for every KM over 5000km. Keep a log, because CRA loves to review these.
redalot wrote: I recently incorporated.. I took the salary through pay roll. But It appears that was less, so I need more money, How do I pay myself accountwise so it make sense in accounting?

2nd Question: I leased a car before getting incorporated. so how do I claim the payments? Its 90% business use..

Thank you.
______
Canadian & US tax guy (CPA)
Deal Fanatic
Sep 23, 2007
5061 posts
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redalot wrote: I recently incorporated.. I took the salary through pay roll. But It appears that was less, so I need more money, How do I pay myself accountwise so it make sense in accounting?

2nd Question: I leased a car before getting incorporated. so how do I claim the payments? Its 90% business use..

Thank you.
1) If you had injected money into the business (usually at the beginning), you can call that a shareholder loan and pay yourself back with no special deductions, up to the amount you contributed. Usually the accountant will put maybe a token amount as capital stock, like $100. The vast majority of small business owners are not going to end up selling their shares so the value of the capital stock for capital gains purposes is irrelevant to most people.

Otherwise, in general you can pay yourself via salary or dividends. Salaries would involve calculating CPP (you would be EI exempt as a sole owner) and income taxes. You make the calculation, and remit to the government. For example, you declare gross salaries of $100. CPP has employee and employer portion. So let's say $1, and $1. Let's say income taxes are $30. So you pay yourself $69, and send $32 to the government (total cost $101). You need to open a business number for this.

Dividends you can pay yourself whenever. When you are the sole owner, you can pay yourself quite randomly and just let the accountant sort it out by year end. Worst case you just need to put some money back into the company. The tax treatment is that it gets grossed up and then you get a tax credit back. It's a bit complicated. I would probably stick with paying yourself salaries.

2) As long as you can justify that car use is business related, you can deduct anything. If audited, the onus falls on you to prove to the CRA. Canada tax works on an audit system. You can report literally anything. CRA analysts have some kind of ratios they look at. If the amount you claim is higher than whatever standards they have, you are much more likely to get selected for a review or audit. If selected, they would ask for supporting documents. They may even review your business operations to see if your claims make sense.
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Sep 15, 2014
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The way I've been doing it is to just take whatever money I need whenever I need it. These are classified as "director's advances".
Then, at the end of the corporate fiscal year, my accountant declares a "management incentive bonus" for me (essentially, my salary) that covers this money (less business expenses) and taxes.

Note that with this method, nothing is being remitted to the government for income tax throughout the year.. so you need to be careful that you don't take out too much.
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Oct 7, 2007
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TheImp wrote: The way I've been doing it is to just take whatever money I need whenever I need it. These are classified as "director's advances".
Then, at the end of the corporate fiscal year, my accountant declares a "management incentive bonus" for me (essentially, my salary) that covers this money (less business expenses) and taxes.

Note that with this method, nothing is being remitted to the government for income tax throughout the year.. so you need to be careful that you don't take out too much.
I am assuming that if your accountant is paying you a salary, then you are remitting income tax and CPP contributions at the time you take your salary (or your accountant is ensuring your corporation does this on your behalf).
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choclover wrote: I am assuming that if your accountant is paying you a salary, then you are remitting income tax and CPP contributions at the time you take your salary (or your accountant is ensuring your corporation does this on your behalf).
Yes, it’s a salary. The total salary is calculated to cover what I’ve taken out (less business deductions) plus required taxes (income tax, CPP..). That gets remitted to the government once a year.

Ex. If I withdrew $40k through the year, he’d declare a salary of, say, $60k.. the rest to cover the taxes. (Not actual numbers.. but I did budget that I’d pay 50% tax to ensure I never spent beyond my means..)
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TheImp wrote: Yes, it’s a salary. The total salary is calculated to cover what I’ve taken out (less business deductions) plus required taxes (income tax, CPP..). That gets remitted to the government once a year.

Ex. If I withdrew $40k through the year, he’d declare a salary of, say, $60k.. the rest to cover the taxes. (Not actual numbers.. but I did budget that I’d pay 50% tax to ensure I never spent beyond my means..)
Sounds like you're doing it correctly. As an aside, you should/would get the benefit of RRSP contribution room by doing this so don't forget to take full advantage if this is something that you want to take advantage of.
Newbie
Mar 6, 2018
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Im an accountant and there are pros and cons to both salary and dividends routes.

Do you want to contribute to CPP (and optionally EI)? Couples who own a corporation sometimes opt into this to work around thresholds for parental leaves.

As someone already mentioned, do you currently have a shareholder loan based on your contributions to the corporation? You can remove that tax free.

I would say the most common route I see our clients do is declare a dividend to “clean up the shareholder loan” at the end of the year to avoid the loan being added as income. Then you are able to remove the money throughout the year and just have the accountant clean it up at the end. Keep in mind, if you haven’t been making instalments then you will likely have a tax bill owing. This can also he done with the “bonus”/“salary” method mentioned earlier.

As someone mentioned earlier, there is a dividend tax credit to counter essentially the gross up. However, the real tax rates for taking a dividend or a salary are essentially the same.

Another consideration is that your RRSP room does not increase from dividends, however you would still be able to max out your TFSA.

Both are good options, there are just pros and cons to both (as intended) that really don’t allow much of an advantage one way or another. Ultimately, talk to your accountant about a shareholder loan and then covering it by declaring dividends or salary.
Deal Expert
Mar 23, 2009
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Can I manage the payroll deductions for CPP myself? Up until this year I had never paid myself a salary from my personal corporation, but now I want to pay myself a real salary that will max out out the CPP limit. My understanding is that the CPP limit for 2020 is $58700, and the contribution rate is 5.25% x 2, or a total of 10.5%, on everything above $3500, meaning the contribution for CPP maxes out at $5796. I assume I will not need to pay Employment Insurance (and I don't want to). Same goes for Employer Health Tax.

But how do I actually do this from a Royal Bank business account? I added myself as an employee, and I can pay myself whatever I want, but I don't see an option to deduct either taxes or CPP at source. I will be the only employee, so getting payroll software to do this seems like overkill.
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Sep 23, 2007
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EugW wrote: Can I manage the payroll deductions for CPP myself? Up until this year I had never paid myself a salary from my personal corporation, but now I want to pay myself a real salary that will max out out the CPP limit. My understanding is that the CPP limit for 2020 is $58700, and the contribution rate is 5.25% x 2, or a total of 10.5%, on everything above $3500, meaning the contribution for CPP maxes out at $5796. I assume I will not need to pay Employment Insurance (and I don't want to). Same goes for Employer Health Tax.

But how do I actually do this from a Royal Bank business account? I added myself as an employee, and I can pay myself whatever I want, but I don't see an option to deduct either taxes or CPP at source. I will be the only employee, so getting payroll software to do this seems like overkill.
You can either make the calculation offline in an Excel file, and track your YTD earnings and deductions, or get a payroll software to track it for you. RBC isn't going to make any calculations for you. CRA has an online payroll calculator. Absolutely you can manage yourself without a software.

I'm not aware of any employer health tax in Ontario that is associated with payroll deductions. I know there is an Ontario Health Premium but that gets worked out on your tax return, not on your payroll.

Calculation is the easy part. You need to remember to remit the deductions to CRA (income tax, CPP). You are correct that you are EI exempt if you are running a 1 man show. You are also supposed to issue yourself a T4 and file it online. To remit payroll, you first need to setup a business number with the CRA, and open a payroll account.
Deal Expert
Mar 23, 2009
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Thanks!
BananaHunter wrote: You can either make the calculation offline in an Excel file, and track your YTD earnings and deductions, or get a payroll software to track it for you. RBC isn't going to make any calculations for you. CRA has an online payroll calculator. Absolutely you can manage yourself without a software.

I'm not aware of any employer health tax in Ontario that is associated with payroll deductions. I know there is an Ontario Health Premium but that gets worked out on your tax return, not on your payroll.
Deducted on the employer's side, but I believe I would be exempt.

https://www.fin.gov.on.ca/en/tax/eht/index.html
Calculation is the easy part. You need to remember to remit the deductions to CRA (income tax, CPP). You are correct that you are EI exempt if you are running a 1 man show. You are also supposed to issue yourself a T4 and file it online. To remit payroll, you first need to setup a business number with the CRA, and open a payroll account.
OK, I have a business number under which I filed my previous years' taxes, and just registered for a payroll account. I have also just registered that payroll account with RBC. I will use this page to calculate the tax and CPP payments:

https://www.canada.ca/en/revenue-agency ... lator.html

For the employer payroll deduction at source, I would just pay all the taxes for both Ontario and federal plus all the employer and employee CPP fees correct? The reason I ask is because when I use the calculator, it only includes half the CPP deductions. That just appears to be the employer CPP amount. If so, how do I pay the employee CPP amount? Can I just double that amount and add that to the remittance amount?

Screen Shot 2020-01-10 at 12.01.06 AM.png

Deductions at source for a hypothetical $5000 per month salary would be $1129.71, including both provincial and federal taxes and CPP, but I'm thinking I need to pay another $247.19 of CPP. Can I just remit $1376.90 and everything will be fine?
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Sep 23, 2007
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EugW wrote: Thanks!


Deducted on the employer's side, but I believe I would be exempt.

https://www.fin.gov.on.ca/en/tax/eht/index.html


OK, I have a business number under which I filed my previous years' taxes, and just registered for a payroll account. I have also just registered that payroll account with RBC. I will use this page to calculate the tax and CPP payments:

https://www.canada.ca/en/revenue-agency ... lator.html

For the employer payroll deduction at source, I would just pay all the taxes for both Ontario and federal plus all the employer and employee CPP fees correct? The reason I ask is because when I use the calculator, it only includes half the CPP deductions. That just appears to be the employer CPP amount. If so, how do I pay the employee CPP amount? Can I just double that amount and add that to the remittance amount?


Screen Shot 2020-01-10 at 12.01.06 AM.png


Deductions at source for a hypothetical $5000 per month salary would be $1129.71, including both provincial and federal taxes and CPP, but I'm thinking I need to pay another $247.19 of CPP. Can I just remit $1376.90 and everything will be fine?
You are pretty detailed. I think you got it. Yes you need to remit both employer and employee portions. I recall there is a button somewhere in the website that states what the employer rate is. I think CPP is matching x 1, and EI is like x 1.4. So your calculation makes sense to me. I heard news that government changed rates for 2020. Double check the legally defined CPP matching rate. I actually use my own Excel template as I find that website to cause me to over-remit. Another less intuitive step is that by the end of the year, you should do a reconciliation to confirm you have not over or under remitted.

Wow...I never learned about the EHT despite owning a business for years. I never got close to the payroll threshold though. It's more of a tax for medium to large businesses. If you have $450k in payroll, you are probably not a small business anymore.
Deal Expert
Mar 23, 2009
18835 posts
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Toronto
OK thanks again.

BTW, according to that link, the Employer Health Tax also applies to some businesses with payrolls much less than $450000 (or $490000), but only those with some link to the government. The rest of us with payrolls under that threshold appear to be exempt. I only know about the EHT because where I used to work (a big organization), they had an exact fixed amount they were willing to pay me, but I had the choice of either being an independent contractor and they would just give me the whole amount, or else I could be an employee and they would deduct all the employer amounts from that number including EHT, EI, CPP, etc. I actually chose to be an employee and pay all that extra stuff (including their employer amounts) since it allowed me to access their very good pension plan.
Deal Addict
Dec 12, 2009
4495 posts
2126 upvotes
Toronto
There is free software for payroll available.

For example, this one https://www.canpay.com/grandmastersuite.html is good for up to 20 employees. The concept is that if you get used to using it and you expand, you will simply buy the paid version.
Following the advice of the Health Experts - I will consider voting for Dougie @ 12:01 AM, five days after the next provincial election.

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