small business tax planning - with Poll

I'll be asking my accountant about this, but always fun to get a variety of opinions, and the fine citizens of beyond.ca have never been shy about sharing ideas before.

Premise: I own a small business, that has been operating at a small loss for the previous tax year. When my business makes money in 2017, what is the most tax-efficient method of paying myself? Assume for the purposes of this exercise that I have no other source of income in the tax year.

considerations:
1) I do accumulate child-care expenses that can only be written off against "regular employment income".
2) the business owes me money for expenses, which are not taxable as personal income
3) the business is incorporated and I have control over its financial actions




Option 1) Pay back expenses, it's tax-free!
Option 2) Pay yourself normal employment income, at least enough to get that child-case deduction
Option 3) Pay yourself dividends
Option 4) You missed something obvious, let me tell you about it.

The strategy varies depending on actual $ figures. With the assumption that you don't have any RRSP's and that you don't want to create RRSP contribution room, you would pay your self a tax free dividend (I think somewhere around $35k) and then pay back expenses.Company expenses you paid personally in accounting terms is a shareholder loan, and that can be carried forward. Current year tax free dividends don't accumulate so you want to take advantage of that first. As for your child-care expenses, are you divorced? If not, and with the assumption your wife is employed, she can claim the child care expenses.

Quote:

---

Originally posted by Konj
As for your child-care expenses, are you divorced? If not, and with the assumption your wife is employed, she can claim the child care expenses.

---

Unless the accountant I talked to was wrong, this is incorrect. A married couple living together, the lower income earner MUST claim the child care expense, even if their income is zero (and it therefore confers no benefit.)

I'm i'm wrong on this point, I'll be redoing my 2016 taxes, so I'd like to understand what you mean.

Quote:

---

Originally posted by ExtraSlow

Unless the accountant I talked to was wrong, this is incorrect. A married couple living together, the lower income earner MUST claim the child care expense, even if their income is zero (and it therefore confers no benefit.)

I'm i'm wrong on this point, I'll be redoing my 2016 taxes, so I'd like to understand what you mean.

---

That sounds about right actually. But then again, it all depends on actual $. Which you probably don't want to disclose so it's best to talk to your accountant.

One thing I didn't mention is that salary vs dividend, with salary the business gets a tax expense where as dividends are paid after tax dollars.

There are a couple things to remember about paying yourself a salary vs a dividend:

The first is that with a salary, the Company is supposed to make source deductions for tax remittances and CPP.

The second is that you are going to have to pay CPP with the Corporation having to make equal contributions to the amount you are required to pay.

Third is that with the child care deductions it is limited based on the age of the child (11,000 for children born in 2016, 8,000 for children born between 2010 and 2015, 5,000 for children born from 2000-2009) and the your income has to be more then 3/2 of the deduction (ie for a deduction of $10,000 you would need 'earned income' of at least $15,000 to get the full deduction).

Probably the biggest question is what you are planning to personally take out of the Company. Generally I would say that in your situation that the answer would be some combination of the three.

Have salary high enough to get the maximum deduction for child care, then use the existing shareholder loan to pay yourself as much as desired with no additional tax consequences then pay yourself dividends for any amounts in excess of the existing shareholder loan and salary.

...

From talking with my accountant, if you pay yourself by dividends, you aren't allowed to deduct any home/office expenses

He recommended I pay myself via a 'management fee'. You don't have to worry about doing payroll taxes, and filing monthly forms with CRA then, and you would be able to deduct home/office expenses

Quote:

---

Originally posted by yellowsnow
From talking with my accountant, if you pay yourself by dividends, you aren't allowed to deduct any home/office expenses

He recommended I pay myself via a 'management fee'. You don't have to worry about doing payroll taxes, and filing monthly forms with CRA then, and you would be able to deduct home/office expenses

---

I am surprised that this was recommend to you. CRA has been really cracking down on this practice of paying yourself management fees from your company along with the fact it might expose you to some GST issues and potentially having to remit CPP personally if you report it as self-employment income on your personal tax return.

Paying yourself management fees, don't you have to become a consultant to yourself, and then like tripleP said, charge GST to your company? Seems like a hole with no bottom. Or am I confused?

You cannot deduct home office expenses unless you have actual clients visiting your office. It has been like this for many years.

You can expense things like furniture, etc, just not things like heating expenses, nor mortgage costs.

You can certainly pay yourself "management fees" (you can call them whatever the hell you want, it doesn't matter to the CRA. Call them snoopsy-doodles if you want), but they're just classified as employment income.

I do expense my phone bill.

One thing that helps, when you take money out of the company to pay yourself, simply call them "draws". Anything that's an expense, take that money out separately, called "expenses".

If you classify transactions as 'dividends', 'management fees' etc at the time you take out the money, then you have no choice but to call them that at year end, unless you want to roll back transactions, and that will get you into trouble.

Quote:

---

Originally posted by suntan
You cannot deduct home office expenses unless you have actual clients visiting your office. It has been like this for many years.

You can expense things like furniture, etc, just not things like heating expenses, nor mortgage costs.

You can certainly pay yourself "management fees" (you can call them whatever the hell you want, it doesn't matter to the CRA. Call them snoopsy-doodles if you want), but they're just classified as employment income.

I do expense my phone bill.

---

Cant you issue yourself a T22-whatever to say that as an employee of your corp you incur expenses in the course of your duties?

No one that's self-employed pays payroll taxes more frequently than quarterly.

...

Your example has not been allowed for quite a while now, unfortunately.

...

http://www.cra-arc.gc.ca/tx/ndvdls/t...sn/hm-eng.html

The first one's become sticky. I have a home office but of course I don't use it more than 50% of the time anymore.

I see where you're coming from - the people that actually do.

...

Yeah they really started cracking down on the 50% rule during the last couple years of Harper's rule.