At the end of the day, you want to be rewarded for the effort you put into your business. How you pay yourself will depend on the business structure that you have chosen.
Getting paid in a sole proprietorship or partnership has very different impacts on your personal taxes and income than getting paid through a corporation that you have set up to run your business.
Getting paid in a sole proprietorship or partnership
As the net income of your business (or your share of the net income of a partnership) is considered your personal income, you will take money from the business by way of a "draw".
The net income of a sole proprietorship or partnership (and, therefore, your "draw") is taxed at personal tax rates.
Owners do not normally earn salaries, bonuses or dividends from an unincorporated business.
"Source deductions" such as income tax, Canada Pension Plan (CPP) and Employment Insurance are not withheld from draws.
You and your partners make your own CPP payments and quarterly tax payments.
Net losses of the business are deductible against other sources of income, such as employment, rental and investment income.
Getting paid in a corporation
A business owner (shareholder) can receive regular salaries and bonuses, like other employees.
Source deductions such as CPP and tax must be withheld from salary and bonus payments.
Business owners may also receive dividends, which represent a share of the company's after-tax profits.
The net earnings (profits) of an incorporated company are taxed at combined federal-provincial corporate tax rates. Manufacturers and companies with net income of $300,000 or less pay lower rates.
Businesses often use employee bonuses to reduce profit so they can qualify for certain incentives, such as the small business tax rate or federal research and development tax credits.
Your accountant can help you set up the payment policies and systems that work best for your business and your personal needs.
Your accountant can help you set up the payment policies and systems that work best for your business and your personal needs.
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