You’ve earned the fruits of your labor. But not all paycheques are equal. Here are the implications of some popular compensation options:
Salary: The best way to draw a steady flow of cash. A salary also lets you make RRSP, EI and CPP contributions.
Bonuses: Paying yourself and your employees a bonus can drop your firm into a lower tax bracket. In some cases, says Bruce Ball, national tax partner at BDO Dunwoody in Toronto, staff can lend their bonuses back to the company; the interest paid is tax-deductible.
Dividends: Although dividends are taxed at a discount to your marginal rate, your business is also taxed on them before they’re paid out. If your corporate tax rate is low, the total tax savings on dividends swing slightly in your favor; if it’s high, they’re best avoided.
IPPs: Individual pension plans are an effective way to take money out of the business and put it into a defined-benefit retirement plan. Contributions are tax-deductible to you and your company, and are creditor-proof.
RCAs: Retirement compensation arrangements are seldom your best option, but are especially attractive if you’re nearing retirement and planning to settle abroad.
© 2004 Caroline Cakebread