Is it Better to Receive Management Fees or Salary from Your Corporation?

Allan Madan, CA
 Nov 27, 2014
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Are you an incorporated business owner? Have you wondered about paying yourself management fees or a salary? If the answer is yes, then this article is for you! I will discuss the pros and cons of management fees and salary.

Paying yourself management fees or a salary

As an owner of a corporation you can choose to pay yourself a salary or a management fee. The benefits of a salary are:

  • Taxes are automatically withheld from each paycheque so you don’t have to worry about putting money aside to pay your personal tax bill come April 30th.
  • You will receive a T4 slip showing your salary for the year. Having a T4 slip is very valuable, especially if you are applying for a loan or a mortgage from your bank.

On the other hand, the benefits of a management fee are:

  • You can claim tax deductions on your personal tax return against the management income received in the year. This will ultimately reduce your tax bill. Common tax deductions include car expenses and home office expenses.
  • You don’t have to worry about payroll taxes or filing monthly payroll forms with the CRA, which can be a nuisance.

Here is the bad news, in my experience the CRA is aggressively targeting individuals who pay themselves management fees from their corporation. The CRA could reclassify the management fees that you received in the year as salary, and then enforce a penalty for failure to withhold payroll taxes. To avoid this, I would strongly recommend you take the following steps:

  • Prepare a management agreement between yourself and your corporation.
  • In the management agreement clearly specify the services you will be providing to your corporation.
  • Prepare monthly invoices for management services rendered to your corporation.
  • Have your corporation pay your invoice on time every single month.

So Here’s the Tip:
Review the pros and cons of management fees and salary carefully, then choose the method of payment that suits your personal circumstances the best.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 15

  1. Our company closed down….All accounts with CRA were closed. There are still small assets in the company as well as some money in the bank account. How to I write these off and take the cash? If I take the cash how do I record that on my T1?

  2. I have been watching your videos .you are a wise person how much does it cost to get personal advice from you ?

    1. Hi Donald, thank you for your positive feedback. The fee for a 30 minute paid consultation for tax advice is $110 + tax. We can conduct the consultation on the phone, in-person or on SKYPE. Please let me know how you would like to proceed.

  3. Great info thanks. I really enjoy your posts and video! If I were to pay myself a management fee would I need to also provide a T4A?

  4. Hi, quick question with management Fees. As a owner of rental corporation, is it possible to have corporation pay the vehicle (auto) costs (claim it on business) and then just take a management fee from the corporation (will not take any expenses when this income is added to the personal tax)? Thanks

    1. Hi Kultar,
      This is no longer possible. The CRA will likely treat management fees paid to the owner as salary, and as such, your company could be penalized for failure to deduct payroll taxes.

  5. Hi alan
    Always enjoy your tips. right now i receive rental income from 2 properties. I would like to split the income with my spouse (no income) who stays at home with the kids, but helps with the property management. I am not registered as a business. I am not sure which is the best strategy to help reduce our taxes.
    Can i just pay here one time management service fee instead of paying her a salary (which is what i keep seeing online). If i pay her a management fee does she need to be registered as business?
    Example: Let’s say my rental income less all other expenses are $6000. She would receive $3000 for her services which i pay 1/2 at the start of the new tenant lease and the remaining at the end of the year, when the tenant(s) move out. Essentially she is issuing me a receipt for her services that i pay for. Should the receipt include GST/QST ? Is it even required ? Can she issue a receipt if she is not registered as a business?
    She will declare this income for tax purposes? What does she need to show other then that receipt?
    Thanks

    1. Hi SS,

      If she only works for you and does not provide property management services to other customers, she cannot charge ‘management fees’ to you. She will be considered a part-time employee, and so you must open a payroll account under your name and pay her wages net of the payroll tax. Also, you will have to remit payroll taxes to the CRA.

  6. Hi there, thanks for this. As the owner of my company, if I pay myself management fees, do I have to charge HST on my invoices?

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