The final question that a business owner will whisper during a tax consultation: “how should I finance my “lifestyle”? We have noticed, year after year, theatrical dissemination of information that varies according to the professional vocation of the information provider. Our goal is to give you a simple analytical framework in a general context of integrated financial/tax planning, allowing you to make your own decisions.
The concept of “lifestyle” income is the sum of all our contracts, obligations, and personal activities resulting from an exchange of a counterparty debited from our bank account. This concept should be used to optimize your shareholder compensation. Go to your bank account; use your bank’s propriety budget tool to determine the total amount of your monthly obligations.
” A Start-Up “
First, the incorporation of a company allows you to use the concept of a dividend. It is important to note that when we start a company – as part of a project involving business risk – liquidity is often thin and sometimes missing. Thus, for a new company in “Start-up” mode, it could be wise to pay, respecting a determined time horizon, an income mainly paid as a dividend.
Use your compass
First, identify your corporate tax rate as a numerical percentage. This tax rate remains an important planning tool; it will be a “marker” for establishing your salary policy.
Taxed at a “low corporate rate.“
From the outset, determining a shareholder’s remuneration will depend on the general calculation of the benefit of payment, either in salary or dividend. On the other hand, in the context of a business with a “low corporate rate” and a shareholder with a high “lifestyle,” a dividend payment has a better chance of winning.
Moreover, the dividend advantage is amplified when: your “lifestyle” burn rate is lower, or you are in a “start-up.” Furthermore, the social charges will not be as large, which favors the maintenance of the dividend advantage.
Taxed at a “large corporate rate.“
On another note, regardless of your “lifestyle” burn rate, there may be an advantage to paying a salary when your business is taxed at the “large corporate rate.” Indeed, the latter tends to weigh, according to a specific spectrum, towards the distribution of a corporate salary.
Professionals with a “hybrid corporate rate.“
In Quebec, you lose some tax savings related to a tax deduction if your employees do not work, in total, a certain number of hours of work. A company with a “middle rate between the lowand large corporate rate” is the simplest case to analyze. The salary will be predominant during the analysis, and it would be advantageous for them to favor the payment of corporate compensation.