As a business owner, you have the ability to pay yourself a salary or dividend or a combination of both. In this article and infographic, we will examine the difference between salary and dividends and review the advantages and disadvantages of each.
When deciding to pay yourself as a business owner, please review these factors:
How much do you need?
Determine your cash flow on a personal and corporate level.
How much tax?
Figure out how much you will pay in tax. Business owners understand that tax is a sizeable expense.
Depending on the province you reside in and your income, make sure you also include income from other sources to determine your tax rate. (Example: old age security, pension, rental, investment income etc.)
If you decide to pay out in dividends, check if you will be paying out eligible or ineligible dividends. The taxation of eligible dividends is more favorable than ineligible dividends from an individual income tax standpoint.
For taxation year 2020, the small business federal tax rate is 9% . Please also remember, if you pay out salary, salary is considered a tax-deductible expense, therefore this will lower the corporation’s taxable income versus paying out dividends will not lower the corporation’s taxable income.
Other considerations
If you pay yourself a salary, these options are available.
As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make.
This is unique to your circumstances and a cost-benefit analysis to determine the amount of contributions makes sense.
For shareholders owning more than 40% of voting shares, EI is optional . There are situations worth careful thought such as maternity benefit, parental benefit, sickness benefit, compassionate care benefit, family caregiver benefit for children or family caregiver benefit for adults.
The infographic below summarizes the difference between Salary vs. Dividend.
Canada Emergency Response Benefit to help workers and businesses
in 2020 Only, blog$2,000/month for 4 months – Canada Emergency Response Benefit to help workers and businesses
To support workers and help businesses keep their employees, the government has proposed legislation to establish the Canada Emergency Response Benefit (CERB). This taxable benefit would provide $2,000 a month for up to four months for workers who lose their income as a result of the COVID-19 pandemic. The CERB would be a simpler and more accessible combination of the previously announced Emergency Care Benefit and Emergency Support Benefit.
The CERB would cover Canadians who have lost their job, are sick, quarantined, or taking care of someone who is sick with COVID-19, as well as working parents who must stay home without pay to care for children who are sick or at home because of school and daycare closures. The CERB would apply to wage earners, as well as contract workers and self-employed individuals who would not otherwise be eligible for Employment Insurance (EI).
Additionally, workers who are still employed, but are not receiving income because of disruptions to their work situation due to COVID-19, would also qualify for the CERB. This would help businesses keep their employees as they navigate these difficult times, while ensuring they preserve the ability to quickly resume operations as soon as it becomes possible.
The EI system was not designed to process the unprecedented high volume of applications received in the past week. Given this situation, all Canadians who have ceased working due to COVID-19, whether they are EI-eligible or not, would be able to receive the CERB to ensure they have timely access to the income support they need.
Canadians who are already receiving EI regular and sickness benefits as of today would continue to receive their benefits and should not apply to the CERB. If their EI benefits end before October 3, 2020, they could apply for the CERB once their EI benefits cease, if they are unable to return to work due to COVID-19. Canadians who have already applied for EI and whose application has not yet been processed would not need to reapply. Canadians who are eligible for EI regular and sickness benefits would still be able to access their normal EI benefits, if still unemployed, after the 16-week period covered by the CERB.
The portal for accessing the CERB would be available in early April.
Canadians would begin to receive their CERB payments within 10 days of application. The CERB would be paid every four weeks and be available from March 15, 2020 until October 3, 2020.
Comparing TFSAs and RRSPs – 2020
in 2020 Only, blog, Family, Individuals, Investment, Retirees, RRSP, tax, Tax Free Savings AccountIf you are seeking ways to save in the most tax-efficient manner available, TFSAs and RRSPs can both be effective options for you to achieve your savings goals more quickly. However, each plan does have distinct differences and advantages / disadvantages. We’ve separated our comparisons into 2 different infographics: deposits and withdrawals.
In the Deposit phase, we look at:
Contribution Room
Carry Forward
Contribution
Tax Deductibility
Tax Treatment of Growth
Contribution Room
TFSA : $6,000 for 2020. If you never opened a TFSA, you can contribute up to $69,500 today.
$5,000 for each year from 2009 to 2012;
$5,500 for each of 2013 and 2014;
$10,000 for 2015;
$5,500 for each of 2016, 2017 and 2019
$6,000 for each of 2019 and 2020
RRSP : 18% of your 2020 pre-tax earned income or $27,230. So for example if you earned $60,000, then your deduction limit would be $10,800 (18% x $60,000). If you earned $200,000, then your deduction limit would be capped at the max limit of $27,230.
Carry Forward
TFSA : You can carry forward your unused contribution room indefinitely, as long as your a Canadian resident, older than age 18 with a valid social insurance number. Withdrawals will usually result in new contribution room.
RRSP : You can carry forward your unused contribution room until the age of 71 when you have to convert your RRSP to a RRIF. Any withdrawals made from your RRSP will not result in new contribution room.
Contribution
TFSA : You are contributing to your TFSA with After-tax dollars.
RRSP : You are contributing to your RRSP with Pre-tax dollars.
Tax Deductibility
TFSA : Contributions are not tax deductible.
RRSP : Contributions are tax deductible.
Tax Treatment of Growth
TFSA : The growth inside a TFSA is tax free therefore it’s a great savings vehicle for immediate objectives such as a down payment for a home.
RRSP : The growth inside an RRSP is tax deferred, which means at withdrawal, you will need to pay tax, therefore it’s a good choice for long term goals such as retirement.
In the Withdrawals phase, we look at:
Conversion
Tax Treatment
Government Benefits
Contribution Room
Conversion
TFSA : With a TFSA, there’s no conversion.
RRSP : You must convert your RRSP to a Registered Retirement Income Fund by December 31st of the year you turn 71.
Tax Treatment
TFSA : You can make tax-free withdrawals.
RRSP : Your withdrawals are taxed as income except for withdrawals under the Home Buyers Plan, which you can withdraw up to $35,000 providing you pay within 15 years or Lifelong Learning Plan, which you can withdraw up to $20,000 ($10,000 per year) providing that the money is paid back within 10 years.
Government Benefits
TFSA : Your withdrawals doesn’t affect eligibility for income tested government benefit because TFSA withdrawals aren’t included as taxable income.
RRSP : RRSP withdrawals are treated as taxable income therefore withdrawals may affect income tested tax credits such as Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit and the Age Credit. Withdrawals may also affect government benefits you receive including Old Age Security, Guaranteed Income Supplement and Employment Insurance benefits.
Contribution Room
TFSA : You can carry forward your unused contribution room indefinitely, as long as your a Canadian resident, older than age 18 with a valid social insurance number. Withdrawals will usually result in new contribution room to the following year’s contribution.
RRSP : Contribution room is based on your previous year’s earned income. You can carry forward your unused contribution room until the age of 71 when you have to convert your RRSP to a RRIF. Any withdrawals made from your RRSP will not result in new contribution room.
An additional different to note is that:
You are able to specify your spouse as your beneficiary with both your TFSA and your RRSP, however there is a key difference with how your savings are treated upon your spouse’s death. With an RRSP, there will be taxes payable upon the monies left in the plan by your children who inherit it, whereas with a TFSA, tax is only paid on the increase in the value of the plan since the date of death in the year that it is inherited by your children. What’s more, no tax is payable if the value that they receive is less than the value of the TFSA at the time of death.
In summary, your unique financial needs will provide information on what makes the most sense for you.
Contact us and we can help.
Salary vs Dividend
in blog, Business OwnersAs a business owner, you have the ability to pay yourself a salary or dividend or a combination of both. In this article and infographic, we will examine the difference between salary and dividends and review the advantages and disadvantages of each.
When deciding to pay yourself as a business owner, please review these factors:
How much do you need?
How much tax?
Other considerations including retirement and employment insurance.
How much do you need?
Determine your cash flow on a personal and corporate level.
What’s your personal after-tax cash flow need?
What’s your corporate cash flow need?
How much tax?
Figure out how much you will pay in tax. Business owners understand that tax is a sizeable expense.
What’s your personal income tax rate?
Depending on the province you reside in and your income, make sure you also include income from other sources to determine your tax rate. (Example: old age security, pension, rental, investment income etc.)
If you decide to pay out in dividends, check if you will be paying out eligible or ineligible dividends. The taxation of eligible dividends is more favorable than ineligible dividends from an individual income tax standpoint.
What’s your corporation’s income tax rate?
For taxation year 2020, the small business federal tax rate is 9% . Please also remember, if you pay out salary, salary is considered a tax-deductible expense, therefore this will lower the corporation’s taxable income versus paying out dividends will not lower the corporation’s taxable income.
Other considerations
If you pay yourself a salary, these options are available.
Do you need RRSP contribution room?
As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make.
Are you interested in contributing to the Canada Pension Plan?
This is unique to your circumstances and a cost-benefit analysis to determine the amount of contributions makes sense.
Do you need employment insurance (EI)?
For shareholders owning more than 40% of voting shares, EI is optional . There are situations worth careful thought such as maternity benefit, parental benefit, sickness benefit, compassionate care benefit, family caregiver benefit for children or family caregiver benefit for adults.
The infographic below summarizes the difference between Salary vs. Dividend.
We would also advise that you get in touch with your accountant to help you determine the best mix for your unique situation.
Contact Us
Source:https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.htmlSource:https://www.canada.ca/en/employment-social-development/programs/ei/ei-list/reports/self-employed-special-benefits.html#h2.01-h3.02Interest, Dividends and Capital Gains- What’s the difference?
in blog, Investment, RRSP, Tax Free Savings AccountDefined Contribution vs. Benefit Pension Plan for Employees
in blog, Group Benefits, pension planRetirement Planning for Business Owners Infographic
in blog, Business Owners, corporate, health benefits, life insurance, long term care, pension plan, RRSP, Tax Free Savings AccountFor a business owner, one of challenges that faced is learning how to balance between reinvesting into the business and setting money aside for personal savings. For a business owner, since there are no longer employer-sponsored pension plans and the knowledge that retirement will come eventually, it’s important to have a retirement plan in place.
We’ve put together an infographic checklist that can help you get started on this. We know this can be a difficult conversation so we’re here to help and provide guidance to help you achieve your retirement dreams.
Income Needs
Determine how much you need in retirement.
Make sure you account for inflation in your calculations
Debts
If you have any debts, you should try to pay off your debts as soon as you can and preferably before you retire.
Insurance
As you age, your insurance needs change. Review your insurance needs, in particular your medical and dental insurance because a lot of plans do not provide health plans to retirees.
Review your life insurance coverage because you may not necessarily need as much life insurance as when you had dependents and a mortgage, but you may still need to review your estate and final expense needs.
Prepare for the unexpected such as a critical illness or long-term care.
Government Benefits
Check what benefits are available for you on retirement.
Canada Pension Plan- decide when would be the ideal time to apply and receive CPP payment. Business owners are in a unique position to control how much can be contributed to CPP by deciding to pay salary or dividends. (Dividends don’t trigger CPP contributions.)
Old Age Security- check pension amounts and see if there’s a possibility of clawback.
Guaranteed Income Supplement- if you client have a low income, you could apply for GIS.
Income
Are you a candidate for an individual pension plan (IPP)? IPPs can provide higher contributions than typically permitted to an RRSP and the ability to create a lifelong pension.
Check if your business is a candidate for a group RRSP or company pension plan. This is a great way for you to build retirement savings and provide benefits for your employees and business too.
Make sure you are saving on a regular basis towards retirement- in an RRSP, TFSA, or non-registered. Since you can control how you get paid, salary or dividends, dividends are not considered eligible income to create RRSP room, therefore you should make sure you have the optimal mix of both to achieve your financial goals.
Ensure your investment mix makes sense for your situation.
Don’t forget to check if there are any income sources. (ex. rental income, side hustle income, etc.)
Assets
The sale of your business can be part of your retirement nest egg. Therefore, you should make sure you know the valuation of your business and your plan to sell the business to your family, employees, partners or a third party. You should also know when you decide to sell your business too.
Are you planning to use the sale of your home or other assets to fund their retirement?
Will you be receiving an inheritance?
One other consideration that’s not included in the checklist is divorce. This can be an uncomfortable question, however divorce amongst adults ages 50 and over is on the rise and this can be financially devastating for both parties.
Next steps…
Contact us about helping you get your retirement planning in order so your retirement dreams can be achieved.
Retirement Planning for Employees
in blog, Family, health benefits, life insurance, RetireesWhen thinking about retirement, it can be overwhelming to figure out all the numbers, like what age you’re going to retire, how much money you need and how long do you need the money to last.
We’ve put together an infographic checklist that can help you get started on this. We know this can be a difficult conversation so we’re here to help and provide guidance to help you achieve your retirement dreams.
Income Needs
Determine how much you need in retirement.
Make sure you account for inflation in your calculations
Debts
If you have any debts, you should try to pay off your debts as soon as you can and preferably before you retire.
Insurance
As you age, your insurance needs change. Review your insurance needs, in particular your medical and dental insurance because a lot of employers do not provide health plans to retirees.
Review your life insurance coverage because you may not necessarily need as much life insurance as when you had dependents and a mortgage, but you may still need to review your estate and final expense needs.
Prepare for the unexpected such as a critical illness or long term care.
Government Benefits
Check what benefits are available for you on retirement.
Canada Pension Plan- decide when would be the ideal time to apply and receive CPP payment. (Payment depends on your contributions)
Old Age Security- check pension amounts and see if there’s a possibility of clawback.
Guaranteed Income Supplement- if you client have a low income, you could apply for GIS.
Income
Review your company pension plan. Check if it’s a defined benefits or contribution plan. Determine if it makes sense to take the pension or the commuted value.
Make sure you are saving on a regular basis towards retirement- in an RRSP, TFSA, LIRA or non-registered. Ensure the investment mix makes sense for your situation.
Don’t forget to check if there are any income sources. (ex. rental income, side hustle income, etc.)
Assets
Are you planning to use the sale of your home or other assets to fund their retirement?
Will you be receiving an inheritance?
One other consideration that’s not included in the checklist is divorce. This can be an uncomfortable question, however divorce amongst adults ages 50 and over is on the rise and this can be financially devastating for both parties.
Next steps…
Contact us about helping you get your retirement planning in order so you can gain peace of mind that your family is taken care of.
The Difference between Segregated Funds and Mutual Funds-Infographic
in blog, Business Owners, InvestmentSegregated Funds and Mutual Funds often have many of the same benefits such as:
Both are managed by investment professionals.
You can generally redeem your investments and get your current market value at any time.
You can use them in your RRSP, RRIF, RESP, RDSP, TFSA or non-registered account.
There are key differences including:
Contract
Fees
Guarantees
Resets
Creditor Protection
Probate
Contract:
Segregated Funds: Policy owner, Annuitant and Life Insurance company
Mutual Funds: Account holder, Mutual fund and Investment Company
Fees
Segregated Funds: Management Expense Ratio & Insurance Fee (Typically higher)
Mutual Funds: Management Expense Ratio
Why is this important?
Since Segregated funds are offered by life insurance companies, they are individual insurance contracts. Which means….
Maturity Guarantees
Death Benefit Guarantees
Maturity and death benefit resets
Potential Creditor Protection (depends on the setup)
Ability to Bypass Probate
Mutual Funds do not have these features with the exception of possible creditor protection of RRSP, RRIF dependant on provincial legislation.
What are these features?
Maturity and Death Benefit Guarantees mean the insurance company must guarantee at least 75% of the premium paid into the contract for at least 15 years upon maturity or your death.
Resets means you have the ability to reset the maturity and death benefit guarantee at a higher market value of the investment.
Potential Creditor Protection is available when you name a beneficiary within the family class, there are certain restrictions associated with this.
Bypass Probate: since you name a beneficiary to receive the proceeds on your death, the proceeds are paid directly to your beneficiary which means it bypasses your estate and can avoid probate fees.
We can help you decide what makes sense for your financial situation.
Group Insurance vs Individual Life Insurance
in blog, Group Benefits, life insuranceGroup Insurance vs Individual Life Insurance
“I already have life insurance from work, so why do I need to get it personally?” or “Work has got me covered, I don’t need it.”
While it’s great to have group coverage from your employer or association, in most cases, people don’t understand the that there are important differences when it comes to group life insurance vs. self owned life insurance.
Before counting on insurance from your group benefits plan, please take the time to understand the difference between group owned life insurance and personally owned life insurance. The key differences are ownership, premium, coverage, beneficiary and portability.
Ownership:
Self: You own and control the policy.
Group: The group owns and controls the policy.
Premium:
Self: Your premiums are guaranteed at policy issue and discounts are available based on your health.
Group: Premiums are not guaranteed and there are no discounts available based on your health. The rates provided are blended depending on your group.
Coverage:
Self: You choose based on your needs.
Group: In a group plan, the coverage is typically a multiple of your salary. If your coverage is through an association, then it’s usually a flat basic amount.
Beneficiary:
Self: You choose who your beneficiary is and they can choose how they want to use the insurance benefit.
Group: You choose who your beneficiary is and they can choose how they want to use the insurance benefit.
Portability:
Self: Your policy stays with you.
Group: Your policy is tied to your group and if you leave your employer or your association, you may need to reapply for insurance.
Talk to us, we can help you figure out what’s best for your situation.
Estate Planning for Retirees and Mature Families
in blog, Estate Planning, Family, RetireesWhat happens when the children grow up and they are no longer dependent on their parents? Estate planning for mature families and retirees can bring up a number of issues including family dynamics and harmony. One of the most difficult conversations is around fair or equal distribution of assets. Before you begin putting a plan in place, we always encourage open conversation and a family meeting between the parents and children to provide context behind decisions and therefore it minimizes the surprises and provides an opportunity for children to express their concerns.
We’ve put together an infographic checklist that can help you get started on this. We know this can be a difficult conversation so we’re here to help and provide guidance.
Adult Children
Fair vs Equal (also known as Equitable vs Equal) – like what’s considered to be fair may not necessarily be equal. ex. Should the daughter that’s been working in the family business for 10 years receive the same shares as the son who hasn’t worked in the family business at all?
Are the adult children responsible enough to handle the inheritance? Or would they spend it all?
Family Meeting
Encourage open conversation with parents and kids so context can be provided behind the decisions, there are no surprises and allows the kids to express their interests and concerns.
Facilitate a family meeting with both generations, this will help promote ongoing family unity after death and decrease the chances of resentment later.
Assets/Liabilities
What are your assets? Create a detailed list of your assets such as:
Home, Family Business Interest, Real Estate, Investments- Non registered, TFSA, RRSP, RDSP, RESP, Company Pension Plan, Insurance Policy, Property, Additional revenue sources, etc…
What are your liabilities? Create a detailed list of your liabilities such as:
Mortgage, Loans (personal, student, car), Line of Credit, Credit card, Other loans (payday, store credit card, utility etc.)
Understand your assets-the ownership type (joint, tenants in common, sole etc.), list who are the beneficiaries are for your assets
Understand your liabilities- are there any cosigners?
Make sure you have a will that:
Assigns an executor
Provide specific instructions for distribution of assets
Always choose 2 qualified people for each position and communicate your intentions with them to ensure they’re up for the responsibility.
Taxes and Probate
How much are probate and taxes? (Income tax earned from Jan 1 to date of death + Taxes on Non Registered Assets + Taxes on Registered Assets)
Are there any outstanding debts to be paid?
You’ve worked your whole life- how much of your hard earned money do you want to give to CRA?
How much money do you want to to give to your kids while you’re living?
Consider the following:
The use of trusts.
The use of an estate freeze if you wish to gift while you’re living.
Once you determine the amount of taxes, probate, debt, final expenses and gifts required, review your life insurance coverage to see if it meets your needs or if there’s a shortfall.
Execution:It’s good to go through this but you need to do this. Besides doing it yourself, here’s a list of the individuals that can help:
Financial Planner/Advisor (CFP)
Estate Planning Specialist
Insurance Specialist
Lawyer
Accountant/Tax Specialist
Chartered Life Underwriter (CLU)
Chartered Executor Advisor (CEA)
There are definitely unique situations in many families and things can get complicated so please use this when you feel it’s applicable.
Next steps…
Contact us about helping you get your estate planning in order so you can gain peace of mind that your family is taken care of.