Finance
ON Chiropractic
TAX PL ANNING: DIVIDEN D S & S A L A RI ES
H
ow can you lower your personal income tax? And what should you consider
when deciding how to pay yourself?
Salaries
A
salary is a regular fixed payment
to an individual, usually paid on
a biweekly basis and expressed
as an annual sum. As personal income,
salaries incur payroll source deductions
including monthly CPP contributions and
income tax deductions. They also create
more RRSP contribution room, which
is calculated as a percentage of annual
personal income.
If you are self-employed, you will
report your gross revenues and net
income on Form T2125 (Statement of
Business or Professional Activities) at tax
time. The net amount is viewed as your
salary and you are responsible to pay
income tax and CPP deductions on this
amount.
If you are incorporated, you can be
paid a salary by your corporation.
Reducing Tax on Salary Income
R
RSP contributions are one of the
most advantageous strategies for
tax minimization and long-term
retirement planning. Each contribution
can be used to reduce your annual
taxable income.
For example, if you made $50,000
in salary in 2014 and made no RRSP
contributions, you would be taxed on
the full $50,000. But if you contributed
$10,000 to an RRSP, your taxable income
would only be $40,000 — you would not
pay tax on the $10,000 until withdrawal
from your RRSP.
Some employees are eligible to
deduct specific employment expenses
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FALL 2015
from their taxable income. This is often
done when an employee needs to
travel a lot between work locations,
including house calls. This strategy
requires the employer to sign Form
T2200 (Declaration of Conditions
of Employment), certifying that the
expenses paid by the employee are
required within the terms of employment.
A signed Form T2200 gives the employee
the ability to use Form T777 (Statement
of Employment Expenses) to deduct
their expenses from their taxable income
on a dollar-by-dollar basis. Some
potentially eligible expenses include
a home office, cell phone or travel
expenses.
Since Form T777 is so useful for
reducing tax, it is usually scrutinized by
the CRA. If you plan to use this route,
OCA members are advised to contact
OCA Advantages partner SRJ Chartered
Accountants or another accountant
first for more information. Please also
note that a signed Form T2200 does not
guarantee that the employee’s expenses
will be deductible. Eligibility to deduct
expenses is governed by the CRA.
Tuition credits are non-refundable
tax credits that can be used to reduce
personal income tax. These credits are
available for tuition, education amounts
and textbooks. To receive these tax
credits, you must have a Form T2202A
from your school. If you have used your
tuition credits to reduce your income
tax to zero and you still have credits
left over, you can carry any unused
amounts forward indefinitely or transfer
up to $5,000 in credits to a parent,
grandparent, spouse or common-law
partner.
Dividends
I
f you are incorporated, you can pay
yourself and your shareholders through
dividends.
Dividends are considered investment
income, rather than personal income.
They incur no payroll source deductions
— no monthly CPP or income tax
deductions. However, because dividends
do not count as personal income, they
do not generate RRSP contribution room
and they are not eligible for personal
tax credits such as childcare expense
deductions, medical expense deductions
and other GST credits.
Dividend Tax Credits
B
y paying yourself in dividends, you
can take advantage of dividend
tax credits which can reduce or
even eliminate your personal income tax
burden.
Dividends are paid out from the aftertax profit of the corporation. Because the
corporation has already paid tax on this
money, the government does not tax the
shareholder for the full amount again.
The CRA has come up with a confusing
but powerful strategy to mitigate the tax
burden on dividends.
When you report dividend income
on your tax return, you go through three
extra steps, as shown in the following
example.
SALARIES
DIVIDENDS
RRSP contributions reduce tax on salaries, and salaries create
more RRSP contribution room. Salaries incur payroll source
deductions (CPP, income tax deductions).
RRSP contributions do not reduce tax on dividends, and
dividends create no RRSP contribution room. Dividends incur
no payroll source deductions.
By requiring contributions to CPP, salaries help you to plan
for retirement. If you have a corporation, it must pay the
employer portion of CPP on salaries.
Dividends may not contribute to CPP, limiting your retirement
CPP income. If you have a corporation, it does not pay an
employer portion of CPP on dividends.
Salaries are eligible for personal income tax credits such as
child care expense deductions and medical expenses.
Dividends are not eligible for personal income tax cred