How to Pay Dividends: Completing the T5 Slip and Summary
If you are the owner of a Canadian corporation, you can choose to pay yourself (and other shareholders) dividends instead of a salary. Alternatively, some shareholders also take dividends in addition to a salary depending on their tax planning strategy. If you do decide to pay yourself dividends, it is important to ensure that you prepare the proper documentation for Revenue Canada (CRA) and if you live in Quebec, Revenue Quebec (MRQ) since this must be reported as investment income on your personal tax return in the calendar year in which the dividends are paid. If you are paying dividends to a Canadian shareholder, you must issue a T5 slip while non resident shareholders receive an NR4 slip. The T5 dividend slips are generally due by February 28th of the calendar year following the year in which the dividend was paid Although no income taxes are due at the time of filing the T5 slips with the government, interest and penalties apply for late filing . The process of submitting preparing and submitting the dividend declarations and the documents that need to be filled out and returned to the CRA and MRQ are discussed below:
Frequently Asked Questions About Salary and Dividends by Owners of Corporations
As an accountant and small business financial consultant, one of the most common areas of confusion and questions by small business corporation owners revolves around how to pay themselves and if one way is preferable to another. I have addressed some of them in my blog posts on the factors to consider when choosing salary or dividends and the types of ways to structure your remuneration . There are however specific questions that common up frequently:
How to Reflect Investment Income and Capital Gains/Losses on your Personal Tax Return
Residents of Canada are required to reflect all sources of worldwide income on their personal tax returns. For most individuals, who have investments with Canadian based banks and brokerages, this is fairly straightforward as you will receive the relevant tax slips, usually by March 31st of the year following the end of the calendar year i.e. for the 2023 tax year, you should receive all investment related tax forms and slips by March 31st, 2024. It is important, if you have investment income in non registered investments (i.e. not TFSA, RRSPs or FHSAs), to ensure that you have received all tax documents and report them. Failure to report income can result in penalties by Revenue Canada and Revenue Quebec, which is never great, particularly when it can be easily avoided. It should be noted that since most tax documentation is submitted by the issuer to Revenue Canada (CRA) and Revenue Quebec (RQ) electronically, they usually have a record of the various types of investment income for each taxpayer and can easily identify any missing information.
Consider These Factors When Deciding Whether to Take Salary or Dividends
One of the most common questions I get asked by corporate business owners is whether to take salary or dividends and how much tax can be saved by taking only dividends. The answer unfortunately, like most issues relating to tax, is that it depends on your circumstances. The concept of integration in the Canadian tax system theoretically strives to make taxes payable the same whether you take salary or dividends or a combination of both. In reality, there is always a difference as everyone’s tax situation is distinct.
How to Pay Dividends to Non Resident Shareholders
Anytime a Canadian corporation makes a dividend payment to its shareholders it is required to follow certain procedures. For Canadian shareholders, corporations must prepare a T5 dividend slip for each shareholder that receives a dividend and submit the T5s to Revenue Canada. (Similarly Quebec Corporations must issue an RL1 ). The process for issuing dividends to Non resident (foreign) shareholders who own shares in Canadian companies is different and is discussed below:
Small Business Tax Filing Deadlines for 2019 (UPDATED)
As the year end approaches, small businesses should be aware of the deadlines, imposed by Revenue Canada and Revenue Quebec, for their various tax obligations. Ensuring that these are done on a timely basis can result in significant savings , that can be put to better use in the business , by avoiding interest and penalties. It also helps to prevent aggressive notices from revenue agencies and reduces the red flags that tend to accompany habitually late filers. Below are the deadlines that businesses should be aware of:
Pros and Cons of Incorporating your small business
The decision to incorporate can be a difficult one that many small businesses face at some point in their lifetime and . Incorporation, literally, represents the creation of a new person. Whereas a sole proprietorship is an extension of one's self, a corporation takes on a life of it's own; it can give birth to subsidiary, marry via a merger and die with a dissolution. It has to file it's own tax return, can be sued and has a set of rules that govern it's existence. Below are some of the points to consider when deciding whether to incorporate:
Should You Pay Yourself a Salary or Dividend? 7 Considerations For Small Business Owners
While incorporation has many benefits for small business owners, it does introduce additional complexities that are not faced by registered businesses. Unincorporated business owners are essentially taxed on their net business income, which allows for more time to devote to tax planning and how to spend all of your richly deserved profits. Incorporated business owners, on the other hand, cannot just withdraw cash from their businesses as the need or whim arises. There needs to be a formalized structure in place which usually takes the form of either salary or dividends. Either type of remuneration has tax and other implications that need to be considered before making a decision.
What Is a Capital Dividend and How Does It Benefit Your Corporation
When an individual sells some property, investments or other assets (perhaps you have a Picasso lying around that's appreciated in value), only 50% of the gain is subject to tax. For example if you sell a rental property and realize a gain, after brokerage and expenses, of $100,000, only $50,000 will be taxable. (The actual tax that you pay will depend on your marginal tax rate at the time). The other 50% of the capital gain is a non taxable gain. For a corporation, however, this distinction is a little more complex. In order to allow corporations the same benefit as individuals with respect to capital gains and losses, the 50% non taxable portion of the gain on a corporate capital transaction is allocated to what is referred to as a Capital Dividend Account or CDA. The balance in the CDA, which is a cumulative balance over the lifetime of a corporation, is then available to the shareholders on a tax free basis.