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.
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 pay cheque 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.
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.