Payroll vs. Dividends

If you are operating a corporation there are a variety of ways that you could pay yourself.  Sole proprietors have no options.  They directly earn their income, and they are left with what they earn, less their expenses. This is their taxable income.

When an individual owns shares in a corporation, they can go on the payroll account of the corporation with the other staff (or as a sole staff member).  Most corporation owners don’t put themselves on payroll because there are additional expenses that are incurred as a result, including CPP and EI as well as payroll administration fees.

Owners of corporations also have the choice to pay themselves dividends from after-tax corporate income.  And while you don’t technically have to wait until the end of the year to pay the dividends, you do have to ensure that enough money remains in the corporation so that at the end of the year the corporation is able to pay its corporate taxes – Because if a corporation pays dividends and fails to pay corporate taxes, if those taxes remain unpaid and a collections officer at the CRA is assigned to collect, one of the things they will do is check to see if any dividends were paid to shareholders while there was a corporate tax debt in existence.  If they find that indeed dividends were paid, they will assess the recipients of the dividends for the unpaid corporate taxes.  So, a dividend can be clawed back from shareholders when a corporation is delinquent in paying corporate taxes.  And this makes payroll seem better.  But remember that the corporation is required to withhold source deductions from employees on payroll.  If the corporation is in enough trouble not to pay its corporate taxes, it would likely be in the position of not being able to pay its source deductions remittances.  And in that situation, there will be an assessment made against the directors for the source deductions.

One way or another, it is critical to always be cognizant of the fact that if you are a sole-shareholder and sole-director, regardless of which way you mismanage your trust amounts – by not paying corporate taxes and taking dividends, or by being on payroll and not remitting completely – you will be assessed personally.  Either as a shareholder or as a director.  And while you wear multiple hats, you are still the same person and responsibility rests on you at the end of the day.

 

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