When running a private business, you need cash flow to support your lifestyle. The challenge is minimizing personal taxes, while optimizing income. But removing money from your company for your benefit requires careful planning.
Here are some of your options to extract cash. Each has unique considerations and income tax consequences.
Salary and/or bonus
These options are deductible by the company and taxable. Generally, to be a tax deductible expense, the payment must be considered reasonable for business purposes. And, yes, it’s probably unreasonable to pay your 14-year-old child $50 an hour to stuff envelopes.
Payments to active owner-managers for salary and bonuses aren’t subject to that rule. They are, however, subject to withholding at source, which means income taxes together with the employer and employee portions of CPP/QPP contributions. If you’re a significant shareholder who owns 40% or more of the corporation, or have employees who aren’t eligible for employment insurance, then there are no employee or employer contributions required.