Is It Better to Receive Management Fees or Salary from Your Corporation?
February 26, 2018
If you have an incorporated business, one of the decisions you’ll have to make is whether to pay yourself management fees or a salary. There are a few things to consider prior to making this decision. We’ll look at the pros and cons of each of the options we’ve mentioned in the paragraphs below;
Should you Pay Yourself a Salary?
With a salary, you will have taxes automatically deducted from your paycheque. This means that when you file your personal tax return, you don’t have to worry about putting money aside to pay taxes. Salaries are advantageous in the sense that they allow you to receive the Canada employment credit. If your company gets a taxable income of more than $500,000 then salaries can help you to reduce the exposure to corporate income tax. And since tax is withheld at the source, salary recipients are often not required to remit quarterly but just once in a year. The other advantage of having a salary is that it can help you to get a loan or mortgage from your bank. This is because you will receive a T4 slip which shows how much salary you’ve gotten for the year.
Advantages of paying yourself a management fee
When filing your personal tax return, you can claim tax deductions on the management income that you receive for the year. This is actually a great strategy to lower your tax bill. You can also apply other tax deductions as a business owner such as car expenses. Additionally, with management income, there’s no need to worry about payroll taxes or filing monthly payroll forms with the CRA.
The main downside of paying yourself a management fee is that it is more likely to attract an audit. CRA aggressively targets business owners who pay themselves management fees from their corporation. If they find certain loopholes, the management fees you’ve been paid throughout the year could easily be classified as salary and then you may be faced with a penalty for failing to withhold payroll taxes.
What to do If You Want to Pay Yourself Management Fees:
First and foremost, you need to draft a management agreement which is a contract between yourself and your corporation. This agreement should include details of the services that you will be offering the organization in order to receive the management fees. For each of the management services offered, you need to prepare detailed invoices which will be given to the corporation. Have the corporation make payments to your invoice on time every month or as agreed. If this method of payment works for you, then consider it as opposed to salaries but just ensure you have all the paperwork in case the CRA requests an audit.
Your tax accountant should be able to review your unique situation and advice on whether you need to pay yourself management fees or a salary. Ensure you improve your record keeping if you want to stay away from hefty penalties by the CRA.