CIBC offers guidance for small business owners on withdrawing funds from
their corporations as salary or dividends
TORONTO, Dec. 10, 2013 /CNW/ - CIBC (TSX: CM) (NYSE: CM) - Small business owners risk paying too much in income tax by making the
wrong decision on whether to withdraw funds from their corporations as
salary (bonus) or as dividends, says CIBC's tax and estate planning
expert, Jamie Golombek.
In a new report, Mr. Golombek offers guidance to small business owners
on the most efficient way to pay themselves from their corporations, in
light of recent and future changes in tax rates and rules. The report
assesses the impact of the tax rate advantage, the tax deferral
advantage and the tax-sheltering benefits of an RRSP as factors that
can affect the compensation decision for small business owners.
"Each year, small business owners who run their businesses through
corporations can choose to receive compensation from their corporations
as either salary or dividends. This year, changes such as increases in
the highest personal marginal tax rates in several provinces and
modifications to taxation of dividends will significantly impact the
compensation decision," says Mr. Golombek.
For small business owners who need to withdraw funds in 2013
"When small business owners need to withdraw funds in 2013 to pay for
personal expenses, the 2013 tax rate advantage is an important factor
in the compensation decision," says Mr. Golombek. "Paying dividends can
generate tax savings when there is a tax rate advantage."
Paying dividends is generally the best option for SBD Income (which is
income up to the small business deduction limit of $500,000 in most
provinces) due to the tax rate advantage in most provinces, which
ranges from 0.56 per cent to 4.54 per cent in 2013. For ABI (which is
active business income above the small business deduction limit),
paying salary is generally a better option due to the 2013 tax rate
disadvantage in most provinces, ranging from 0.47 per cent to 5.88 per
For small business owners who can afford to leave money in the company
"For small business owners who don't need to withdraw funds in 2013, it
can pay to defer dividends to a future year," says Mr. Golombek.
Although there will be a tax cost associated with paying dividends
after 2013, there is a significant tax deferral advantage that may help
to offset this cost. This year, the tax deferral advantage ranges from
25.00 per cent to 35.50 per cent across the provinces for SBD Income,
and from 13.30 per cent to 23.07 per cent across the provinces for ABI.
Mr. Golombek added, "If investing the deferred amount will generate
enough income to offset the tax cost, then paying deferred dividends is
the better way to go; otherwise, small business owners should still
withdraw funds in 2013."
Tax-sheltering benefits of an RRSP
While paying dividends may be advantageous in many cases, distributing
corporate income as salary rather than dividends creates earned income
that allows small business owners to contribute to an RRSP. Small
business owners may wish to consider paying sufficient salary to
maximize RRSP contributions, particularly if the RRSP invests in higher
rate of return, highly-taxed investments over a long time horizon.
"Taxation rules for businesses are quite complex and can change
regularly," says Mr. Golombek. "Business owners should consult with a
tax professional and a financial advisor for a complete analysis of all
factors in the compensation decision."
More details along with rates for 2013 and 2014 for all provinces are
available in Mr. Golombek's report, The Compensation Conundrum: Will it be salary or dividends?
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