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Salary paid to owners / shareholder - deductible or not
March 27, 2020
3:02 pm
DaveYVR
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Hello,

I have asked my accountant what the scenario is in these two situations:

1) Dividends paid to me as owner/sole share holder
2) Salary paid to me as owner/sole share holder

In case 1, she says that I will not pay personal income tax on a $20k dividend, but it is not tax deductible from the corporation.

In case 2, she says the company will pay all the required deductions, and I will pay personal tax on the salary, however the salary is tax deductible for the corporation.

Today I come across the following (CRA website) which seams to contradict case 2.

Salaries, wages, and benefits (including employer's contributions)

You can deduct gross salaries and other benefits you pay to employees.

Do not include:

- salaries and wages such as direct wage costs or subcontracts
-drawings of the owners of the business
- salaries or drawings of the owners of the business since salaries or drawings paid or payable to you or your partners are not deductible

source:

Can somebody please shed some light on this. Am I misinterpreting the CRA document?

Thanks,
Dave

March 27, 2020
4:06 pm
happyavocado
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I had originally suggested an answer, but I was wrong -- Julio and Bill are correct. The snapshot is from Schedule T2125, which is for unincorporated self-employed income.

If you pay yourself a salary through your incorporated business, I believe it would be reported on Schedule 125. You would then need to include that salary on your T2125 when you file your personal income tax package.

March 27, 2020
5:24 pm
julio
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DaveYVR, your accountant is correct and your quote is correct, too. The seaming discrepancy originates in your presumption that both quotes pertain to the same subject. They do not. Your accountant addresses taxation of an incorporated business and your cut and paste snippet addresses taxation of a self-proprietorship.

March 27, 2020
6:13 pm
Bill
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Exactly, Julio. The excerpt is re unincorporated self-employment income, which is generally proprietorships and partnerships.

March 28, 2020
9:20 am
DaveYVR
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Thank you greatly for clearing that up. I will have to make sure I am more aware of what category of the CRA site I am on.

I was still a bit confused since I wasn't aware that you could have partners in a Sole Proprietorship . And then I saw in the link that the section is for Sole Prop & Partnerships, but no corporations.

Again thank you.

Regards,
Dave

March 28, 2020
7:15 pm
Bill
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Dave, not sure what you mean when you say "I wasn't aware that you could have partners in a sole proprietorship" - ? Operating an unincorporated business via a partnership or a proprietorship are mutually exclusive, can't have elements of both, it's one or the other. A proprietorship involves only a single owner, a partnership needs at least two partners/owners.

March 29, 2020
10:05 am
DaveYVR
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Hi Bill. Yes, that's exactly what I was getting at. It's what caused my initial confusion in the text when they mentioned partnerships. It is the reason I thought the section was referring to corporations as well as sole proprietorship. But I see now the section is for partnerships and sole proprietorships, but excludes corporations.

In any case, even if I had known it excluded corporations, I would have been concerned that the law applied to corporations as well, which it does not according to answers above. So now I can be confident in handling salary and dividends moving forward.

October 6, 2021
4:43 am
lhsaid
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Question:
Can a Canadian Corporation pay its owner less than the minimum wage ?
I'm the owner and the only employee of my corporation. I want to have the payroll setup, but I don't want to pull too much money. So, I don't want to pay myself the minimum wage.

October 6, 2021
5:34 am
Bill
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Do you mean for provincial labour laws or for income tax purposes?

In any event, why not just record and pay yourself for X number of hours worked when in fact you actually put in X + Y hours?

October 6, 2021
6:08 am
Hubble
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As the owner you are not obligated to pay yourself T4 income or take a dividend. The taxman will just tax the resulting higher profits left in the corporation.

October 6, 2021
6:53 am
lhsaid
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Bill said
Do you mean for provincial labour laws or for income tax purposes?

In any event, why not just record and pay yourself for X number of hours worked when in fact you actually put in X + Y hours?  

Yes, I mean for labor laws, I think for income tax as long as both the corporation and the owner pay their taxes according to their incomes it should be fine.
My concern is that, as employee, do I have to be compliant with the minimum wage law ?

October 6, 2021
6:56 am
lhsaid
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Hubble said
As the owner you are not obligated to pay yourself T4 income or take a dividend. The taxman will just tax the resulting higher profits left in the corporation.  

That's not my question. Please read my answer to Bill above. Thanks

October 6, 2021
7:28 am
Bill
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I quickly checked online info for Ontario, appears not to be an exception re minimum wage requirements for your case, guess you can check for your province.

As I said, if your corp wants to pay you $50 for 10 hours work just record that you only worked 2 hours.

October 6, 2021
11:45 am
Norman1
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In Ontario, exception #11 of Employment Standards Act, 2000, subsection 3(5) could provide an exemption:

3(5) This Act does not apply with respect to the following individuals and any person for whom such an individual performs work or from whom such an individual receives compensation:

1. A secondary school student who performs work under a work experience program authorized by the school board that operates the school in which the student is enrolled.

11. A director of a corporation, except as provided in Part XX (Liability of Directors), Part XXI (Who Enforces this Act and What They Can Do), Part XXII (Complaints and Enforcement), Part XXIII (Reviews by the Board), Part XXIV (Collection), Part XXV (Offences and Prosecutions), Part XXVI (Miscellaneous Evidentiary Provisions), Part XXVII (Regulations) and Part XXVIII (Transition, Amendment, Repeals, Commencement and Short Title).

Lots of exceptions to the exemption though. But, Part IX (Minimum Wage) is not an exception to the exemption.

October 7, 2021
3:32 am
lhsaid
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Bill has a good point up there, the director/owner can work part time for the corporation ? and get paid by the hour ?
Norman1, so you think the minimum wage clause applies to the director/owner as well ?

October 7, 2021
4:42 am
Bill
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There are other ways (e.g. dividends paid to owner), with different tax consequences for both, how an owner can draw money out of a corp but as you were talking about minimum wage rules I assumed you were referring to T4 employment income you had decided your corp would pay you in your capacity as an employee. So, yeah, you can be a part-time employee of your corp. I assume you've run this by your accountant.

October 7, 2021
8:01 am
Norman1
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Being or not being a shareholder doesn't matter in the Ontario Employment Standards Act. It just says directors of a corporation are exempt, except for those nine parts of the act.

One doesn't need to own shares of a corporation to be one of its directors.

Part IX (Minimum Wage) is not listed directly as one of those nine parts. One will need to go through the nine parts and see if any of the parts refer to Part IX about minimum wages.

As well, not all employees are paid by the hour. Some are paid a salary that doesn't vary with the number of hours worked.

For directors, I've seen public companies pay directors an annual retainer plus a fee for each board meeting. Number of hours spent is not involved in the calculation.

October 7, 2021
9:04 am
lhsaid
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Norman1, I'm a director, sole shareholder and sole employee.
Bill, yes, I know there is dividends option to get money out of the corporation. But, I need to run payroll:
1- To be able to use HSA (Health Spending Account) as our healthcare coverage.
2- "Canadian Employment Amount-31260", if you don't have at least $1245 as employment income you'll loose that deduction.

October 7, 2021
12:26 pm
Norman1
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You'll need to run payroll anyways to pay directors.

Director fees are considered to be employment income for income tax purposes and reported on a T4 slip.

That's in spite of the fact that directors are not employees, in Manitoba, for example, under the Employment Standards Code for that province:

"employee" means an individual who is employed by an employer to do work, and includes a former employee but does not include a director of a corporation in relation to that corporation; (« employé »)

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