But, it’s my money…
Certified QuickBooks ProAdvisor
Why can’t I just take it? How often do owner/manager/shareholders ask this question? I have discovered that there are four ways with various tax consequences to remove your money from your company.
If the owner/manager/shareholder works for the company, there should be a contract of employment. The employee contracts with the company for services rendered. The employment expenses guide T4044 applies to the employee. The taxable benefits guide should be consulted about taxable benefits for automobile and other employment benefits that might or might not be taxable, including medical premiums for provincial (taxable) and private health services plans (not taxable).
If the owner/manager/shareholder is actually self-employed and can prove that they are self-employed by meeting the criteria set out in the Employee or Self-employed? Guide RC4110, the owner/manager/shareholder invoices the company just like any other supplier and charges GST, remits it and claims expenses against self-employed income.
These are paid out of after tax profits and of course, when properly documented and paid, a T5 slip is issued and there is a dividend tax credit to the shareholder to reduce the tax paid to compensate for the fact that there is integration or at least the promise of integration in our tax system.
Capital dividend account
This is how to take out the tax free portion of those capital gains that your company earned. The calculation of the capital gains account should be calculated every time there is a capital gain. You might find that a capital gain is offset by a capital loss next month. If you were on top of things, you could pay out the capital gains dividend before the capital loss reduces the account balance. Every owner/manager/shareholder should know that when they trigger a capital gain, it is time to calculate the account balance. Never wait until year end as that may be too late.
Just take it as a management fee (the double tax approach)
This is the “It’s my money and I’m entitled” approach. It’s not only that, but the company should pay my personal expenses as well approach. Recently the rulings department at CRA issued an interesting ruling that clearly sets out what the consequences are for removing money from the company for personal benefit. When you do not have an employment contract, or you are not clearly holding yourself out as self-employed and invoicing the company and no dividends are paid, it isn’t an expense to the company. This withdrawal is a benefit to the shareholder under S. 15(1). Not only that but S. 80.4 interest is deemed to be taxable income to the shareholder on the amounts until they are reported on a T4A to the employee. Remember, this is not an expense to the company, but it is income to the shareholder. So much for integration, if you don’t follow the rules, you are going to essentially pay double the tax.
The take-away from this ruling is that without an employment contract or a clear indication that the shareholder is self-employed and has a contract to provide goods or services to the company, it is not a good idea to just pay the shareholder and worry about the payroll remittances later.
Not only that, but those earnings would probably not qualify for WCB in case of an accident or injury to the shareholder because they wouldn’t meet the criteria for premiums, unless maybe they fell under the WCB premium requirement to pay on dividends. I’d have to check and I can’t be bothered because shareholders shouldn’t be paying themselves this way anyway.