Decoding Dividends
Hello All,
If you are the owner/shareholder of a small business corporation, you likely know something (and is some cases quite a lot) about dividends. As an accountant, it is one of the areas of small business tax that people ask me the most questions about. Mostly, dividends are relatively straightforward, but there are some complexities for which expert tax advice is often necessary.
A dividend is simply a reward for ownership of shares in a corporation that is represented as a payment to a shareholder, usually in cash, but sometimes in kind. Since dividends are only paid to investors, they are considered to be passive income similar to interest, rental income or gains on sale of investments. This has tax implications in the Canadian tax code in that passive income:
does not add to your RRSP contribution room
is taxed at a higher rate when earned in a corporation
may impact the small business deduction available to a company (depending on the amount earned)
does not require payment of CPP/QPP, EI in same way that active income (employment, self employed income etc) does
If you own shares of unrelated companies or funds and they are in an investment account, you don’t have much of a choice with respect to the tax treatment.
However, a small business owner can choose to pay themselves a salary as an employee of the business, dividends as a shareholder or a mix of both. The decision can be based on a variety of factors including whether you want to accumulate RRSP room, contribute to the Canada (or Quebec) Pension Plan, reduce administration and invest within the corporation or qualify for tax credits for which you require a salary.
If you have a small business and you are paying yourself a dividend it will most likely be a non eligible (sometimes incorrectly referred to as ineligible) dividend. Non eligible in this case means that the corporation benefitted from the small business deduction and therefore the tax credit that you receive for payment of dividends is lower than for eligible dividends. In some cases, however, small business will be able to pay eligible dividends when they have benefitted from the small business deduction or have received eligible dividends from another corporation. This is accumulated in an account called the General Rate Income Pool and reflected on your corporate tax return. The balance in this account can then be paid out in eligible dividends for which recipients will pay less personal taxes. This is a complex area of tax but is useful to understand the basics.
If you have a small business corporation and flexibility in how to pay yourself, my advice is usually to familiarize yourself with the choices available to you in terms of owner compensation, understand the fundamental tax implications of each and ensure that it fits in with your broader financial goals.
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From the Blog
I have a variety of posts on dividends. Below are a couple - within them you will find links to other posts if you feel like going down the rabbit hole :)
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
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
Small Business Stuff:
Looking for more reviews?: This listicle from MailerLite gives you a bunch of ideas on how to ask your customers and clients for reviews.
11 Ways to Stop Procrastination: If you’re anything like me, the will to procrastinate is a difficult force to combat. This Linkedin post (along with a nice handwritten list that you print and stick to your fridge) helps you not procrastinate (assuming you don’t procrastinate reading it)
Ecommerce Marketing Tips: Some good tips from Shopify about marketing. Many of the tips apply to any type business and are a useful reminder.
Tax Stuff:
New Trust Reporting Requirements: CRA has introduced a number of new rules for trust reporting, including requirements for “bare trusts” . A bare trust, according to this article from E&Y is:
includes an arrangement where the trust can reasonably be considered to act as agent for its beneficiary(ies) with respect to all dealings in all the trust’s property. Prior to 31 December 2023, bare trusts were effectively excluded from the T3 return filing requirement; however, under the new rules, a bare trust will be required to file an annual T3 return unless an exemption applies.
If you think this might apply to you, I encourage you to contact an accountant who is familiar with the rules and can give you guidance.
RRSP Deadline: For those of you planning to contribute to RRSPs, the deadline for it to be counted towards 2023 taxes, is February 29th.
Keep a Vehicle Log: As tedious as this might be, if you want to claim vehicle expenses, you must keep a log, as this article from taxtips emphasizes. It should be noted that travel from your home to your office (assuming it is not your home) is not considered to be business travel.
QuickBooks Tutorials:
QBO tutorials : A 4 part series on setting up your Chart of Accounts in QBO
Whether you are setting up your chart of accounts for the first time or want some guidance on your existing setup, these tutorials can help. The description for the video also includes a link to a couple of chart of accounts resources.
Non QuickBooks Tutorial: How to File your RL1 Summary online (for those of you in Quebec)
All Quebec employers have to file an RL1 summary. This can either be mailed in or filed online via RQ’s my account for business (clic Sequr). The tutorial takes you step by step through the process.
A variety of other tutorials can be found at my channel here
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Also, if you have any questions about QuickBooks/Xero/Excel or finance in general for which you would like to see a video, please either leave them in the comments section of any of the videos (I see them all) OR email me directly at ronika@montrealfinancial.ca
Free Tools and Resources
Small Business Books
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The Essentials For Starting Your Small Business Corporation
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A Comprehensive Guide to Working with QuickBooks Online
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A Straightforward Tax Guide For Canadian Small Business Owners
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Everything Canadian Business Owners Need to Know about Dividends and How to Pay Themselves
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Everything You Need to Know About Starting Your Sole Proprietorship
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Wishing everyone a lovely (final February) weekend!
Ronika
