As a shareholder and an employee of your own professional corporation (PC), are you receiving payments (i.e. dividend or salary/bonus) in the most tax efficient manner.
There are times shareholders simply remove cash from the PC as a loan; however, you should understand the tax implication of such a move. There could be adverse tax implications; discuss same with your adviser before proceeding.
Now let us review the owner-manager remuneration.
For illustrative purposes, here is the financial snap shot of a dentist/PC:
|–||PC earns a profit of $400,000 (i.e. revenue minus expenses) before any salary paid to the dentist|
|–||PC is subjected to 16.50% corporate tax rate|
|–||Maximum RRSP contribution room is $21,000|
|–||Assumes no EHT|
|–||Assumes the maximum CPP is $2,119.00|
|–||Cash needs of $150,000 (after tax) but includes maximum RRSP contribution of $21,000|
Based on the above, the cheapest way to remove cash from the PC would be option #3 i.e. all dividends. This represents a tax savings of $5,829 (including CPP) over option #1 except dividend income does not generate RRSP contribution room i.e. you cannot contribute to your retirement via RRSP.
The above options are only true if the dentist has no low income family members (i.e. spouse/common law spouse, adult children and parents) to income split. If you do have these family members but have yet to include them in your PC, you might be missing some tax saving opportunities. Discuss it with your advisor if this might benefit you.
Let us revise option #1: if your parents make say $20,000 each and are not receiving Old Age Security or Canada Pension plan payments, they could each receive $34,610 dividend from your PC assuming they become shareholders of your PC. They pay extra taxes of $4,345 each on the dividend income. That means you now have the same cash of $150,000 and the taxes are reduced by over $18,000.
What should your remuneration mix be?
The numbers certainly work but you should review to see if family members should be included for the following reasons:
|–||Dividends paid to certain family members may end up taxed in your hands i.e. at your high tax rate rather than their low tax rate.|
|–||Is the structure flexible enough to enable you to pay dividends to certain family members while excluding others? What about future family members?|
|–||Is your structure going to protect you at difficult time such as divorce or separation? Will you end up losing your dentistry professional corporation to your ex?|
|–||Is your structure protecting you in the case where your children become wayward?|
|–||Are you protected in case of your parents’ death?|
|–||Should shareholders agreement be prepared?|
|–||Would tax problem be created if other family members also own shares of their own private corporation?|
Always consult your advisor before proceeding.