Have you recently incorporated your business? Wondering about how to pay yourself? Stuck between the options salary or management fees? Then read on to get your answer.
If you own a business through a corporation you can choose to pay yourself a salary or management fee. Let’s discuss the benefits and risks associated with management fees and salary to reach out for a solution that best suits you.
If you opt to have a salary from your business, the payments are the expense of the corporation and employment income for you personally.
How to process your salary payment?
To pay yourself a salary the corporation will need to register a payroll account with Canada Revenue Agency (CRA). Each time a salary is paid, the business is required to withhold source deductions (Canada Pension Plan contribution and Income Tax) from your pay. These source deductions are then remitted to the Receiver’s General (CRA) on a regular basis. Also, each year the corporation must prepare and file T4 slips for any employees that earned wages.
Paying yourself a salary can be a way for you to earn a steady and predictable personal income. Some key benefits of using this method include:
Management Fees are the money paid to managers of an investment company for managing the investment portfolio. A management fee is another way of paying a salary to the owner.
Management Fees are often used as a tax planning tool. For management fees to be allowed as a deduction for taxable income, the amount of the fee must satisfy the following conditions:
Management fees have some risk associated with them, as they are often challenged by the CRA where they are not considered reasonable and justified. The CRA is aware that some entities use management fees to eliminate or reduce taxes by shifting income to corporations with losses. In response, the CRA often reviews the deductibility of these fees. In reviewing management fees, the CRA may send questionnaires.
If CRA finds management fee not justifying the above-mentioned criteria it can reclassify the management fees as salary, and then enforce a penalty for failure to withhold payroll taxes.
Contact an accountant so that you know both the advantages and disadvantages in advance before paying yourself the Management fees.
Organized and appropriate documentation is critical to substantiate any management fees you have paid (or that are payable) to support a full deduction based on the above requirements. You must maintain the following documents to avoid any CRA suspicions of bona fide management fees:
It is good to be in side by side with an accounting firm so that when you don’t know what to do just send them an email and you will be notified shortly with the solution.
There are a lot of moving pieces and things to consider when deciding to pay yourself through salary or management fees. If you have any queries to discuss specific to your business situation, then shout out to Filing Taxes – we can help! Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.