The answer to every "How do I pay myself?" question you've ever asked

Note that this discussion is meant to demonstrate the differences between paying a business owner through a sole proprietorship and a corporation. It is meant to further the understanding of compensation methods, and the impacts to both the business and the owner. This discussion is not a demonstration of how to calculate taxes owing, nor a recommendation of which compensation method or organizational structure is more beneficial.

The information provided in this blog is for general informational purposes only. It is not intended to create, and receipt of it does not constitute a client-professional relationship between the reader and Cheer Accounting. Readers should not act upon this information without seeking professional advice specific to their situation.

A little background

Before we dive into how to pay yourself as an owner - let’s look at some background on how taxes are calculated for both a corporation and a sole proprietor. Note that the examples outlined below are designed to demonstrate how owner compensation differs between self-employed individuals and corporations, and the compensation methods available to owner-managed businesses, NOT the amount of taxes owing under each option. Real-world calculations of tax owing are complex, involve many factors, and often cannot be reflected accurately using simple examples. Okay now that we've disclaimed everything we can possibly disclaim (🙃), let's dive in!

What are the tax rates for corporations in Manitoba?

For Manitoba businesses that qualify as Canadian Controlled private corporations, and claim the small business deduction, the net tax rate is 9%.

What are the tax rates for self-employed (unincorporated businesses) in MB?

The amount that unincorporated businesses (sole proprietors) pay in taxes depends on total level of personal taxable income. Personal taxable income depends on a number of factors - one of which is self-employment income. Self-employment income is how much money you’ve made from your business after accounting for all expenses.

For a quick example let's say Hallie runs a craft workshop business. Her sales are 80,000, and her expenses are 30,000. Hallie’s self-employment income is 50,000. If she has no other income from other sources, and no other deductions or credits to claim - her taxable income is 50,000.

Remember that Hallie and her business are the same person for tax purposes. So any income she makes is automatically attributed to her. You can calculate her amounts owing using the income tax calculator here or a list of 2023 tax rates can be found here. Self employed individuals pay federal and provincial taxes, as well as CPP (11.9% on earnings between $3,500 and $66,600) on any self-employed earnings.

If I incorporate, how do the tax rates differ?

When you own an incorporated business, you and your business are considered two different entities for tax purposes. The profit that is earned by the corporation stays in the corporation and is taxed at the corporate rate. Any money that you pull out as an owner to pay yourself will be taxed personally in your hands and classified as either salary (employment income) or dividends (investment income). These are the only two ways to pay yourself from a corporation.

I'm an owner - how do I pull a salary or dividends from the corp?

So we now know that we have two options to pay ourselves from a corporation - salary or dividends. Let's look at how both of those methods work.

Salary

To pay yourself a salary you need to have a registered payroll account with the CRA (info on how to do that here). You also need to make remittances to the CRA on a pre-determined schedule. Calculating and making these remittances can be a headache, so we recommend getting a software system set up to do it for you to minimize the risk of errors (Wagepoint is a great affordable option).

Remember that when you pay yourself via salary you are paying the associated tax up front (that's the remittances to the CRA) when you receive your money (your paycheque) in the bank. So when you file your taxes in April, you will have already payed the tax at source.

Wages and salaries are also a business expense, and will hit your corporation's profit and loss. The amount you pay yourself in salary will be deducted from income, reducing the amount of profit in the business, and ultimately how much corporate tax is owing at the end of your corporation's fiscal year. Paying yourself a wage also gives you RRSP contribution room, and a formal record of earnings. This is in contrast to dividends, which we'll discuss next.

Let's look at a salary example using Hallie's craft business. She has incorporated since our first example. Hallie's sales are 80,000, her expenses are 30,000 and she pays herself 45,000 as a salary.

Hallie will be taxed personally on the 45,000 salary, and her corporation will be taxed on the 5,000 of profit left in her corporation.

Dividends

To pay yourself via dividends, there is a bit less red tape. During the year, as an owner, you can transfer money from the business to your personal account as you need it. The amount of money you transfer to yourself will be accumulated in a dividend account in your bookkeeping. Once the calendar year comes to a close, the amount of dividends will be tallied, and adjusted for any shareholder loan amounts. The total dividends drawn will then be recorded on a T5 slip, which will be included in your personal tax return. Note that non-eligible dividends (dividends received from a corporation that takes advantage of the small business deduction) are grossed up when included in your personal taxes, and will also have an accompanying dividend tax credit.

Let's look at a dividend example using Hallie's craft business. Hallie's sales are 80,000, her expenses are 30,000 and she pays herself 45,000 in dividends.

Hallie will be taxed personally on the 45,000 dividends she received, her corporation will be taxed on 50,000 (80,000-30,000) in profit. Note that dividends are not deducted as an expense within the business, and do not hit the corporation's profit and loss. Dividends are recorded on the balance sheet and therefore have no effect on net profit.

When Hallie files her tax return in April, she will pay any taxes associated with the dividends she received in the prior calendar year, as she has not paid them at source like she did with her salary.

Check out this calculator to calculate an estimate of taxes owing associated with non-eligible dividends as a form of income.

If I want to pay myself via salary, do I need to be consistent in my payments? IE every two weeks, or every month? Or can I just pay myself as I need it?

Most software systems are designed to pay salaried employees a pre-determined amount on a pre-determined schedule - bi-weekly, semi-monthly, monthly. That being said, most software systems also have the power to skip, or edit the amounts of a payroll as needed. If cashflow is scarce, you do not need to pay yourself just for consistency sake. You do still need to report a nil remittance to the CRA if you go an extended period of time without drawing a salary.

Note that paying yourself a bonus is a form of salary. So a lump sum payment to yourself as a 'bonus' should still have deductions remitted at source.

Unsure about which method to choose?

Let's chat! Understanding the many nuances of how to pay yourself, and the implications it has is complex. Reach out to us here and we can help you figure out what is best for you and your business.