When it comes to taking money out of a corporation, the nagging question is what’s better, salary or dividends?

While there are a number of factors to consider when answering that question, if you’ve worked out that salary is your best option, the next question is how you actually pay yourself that salary.

So just what does it mean to pay yourself a salary?

Simply taking money out of corporation is neither a salary or dividend by CRA standards and is only a shareholder loan. Without somehow declaring to the CRA whether those withdrawals are salary or dividends, it will be as if you are borrowing money from the corporation which you’re expected to pay back.

What truly defines whether compensation is salary or a dividend is the information form that is issued to the CRA.

How do I pay myself?

How do I pay myself?

Each year by the end of February, a corporation must issue a T-slip to inform the CRA whether salary or dividends were taken: a T5 is submitted to declare dividends while a T4 is issued to declare salary. The contents of the T4s or T5s that were issued to you are then recorded on your T1 personal tax return.

While issuing a T4 slip for salary is all well and good, there’s a catch. When you declare yourself a salary, it’s expected that you make remittances on the payroll amount. The concept of payroll remittances was introduced years ago when governments required employers to withhold the amount of tax that their employees were expected to pay.  Instead of allowing employees to keep their full income then pay a lump sum of tax at the end of the year, the government could have a consistent flow of cash and then return any overpayment to the employees once they filed their taxes or tax return.

Even though you may be a shareholder, you’re officially an employee of the company if you’re paying yourself a salary. As such, payroll remittances for employees who are shareholders generally consist of income taxes and CPP*.

So how do you pay those remittances?

Here are some common methods of declaring a salary and making those remittances throughout the year:

Year end bonus

When completing your fiscal year-end, you’ll declare yourself a lump sum bonus. For example, if you’ve decided on a 40K salary, you may make a 10K remittance to account for your CPP and income tax obligations. Once the remittance is made, the salary will be considered to be paid. Using an online payroll calculator can help you determine how much of a remittance to make and any difference will be accounted for on your T1 personal tax return.

Periodic remittances

As cash flow can sometimes be tight, you may not be so thrilled to make a lump sum payment at the end of the year. Paying remittances on a quarterly or periodic basis can allow you to manage cash flow while ensuring you pay yourself a salary throughout the year.

Monthly remittances

If your business is somewhat predictable, it may be a good idea to create a monthly payroll schedule using the CRA payroll calculator. This will ensure you get paid each month and make your T4 easy to calculate at the end of the year.

Payroll software

There are some great online payroll applications that calculate your remittances, make the required payments and transfer money to your account automatically. Choosing the right app depends on a number of factors so make sure you do your research before settling on one. For starters, you can check out SimplePay or Wagepoint.

Not sure what method best suits your situation?

Talk to your accountant to ensure you decide on a strategy that combines cash flow with effective tax planning.*There are cases where additional payroll remittances will be required which are beyond the scope of this blog.