Reducing Taxes Through Dividend-Salary Mix Calculations

Should I take wages or dividends from my privately owned corporation? What is the best way of taking money out of my company? In other words, what will result in the least amount of income taxes?

A Canadian accountant will perform a dividend-salary mix calculation to determine the best way of withdrawing money from the corporation.

Even though Canadian income tax laws are different from other jurisdictions, some of the same principles of tax planning will still apply.

In order to qualify for Canada Pension Plan (C.P.P.) benefits or to make Registered Retirement Savings Plan (R.R.S.P.) contributions, there must be some earned income. This requires the payment of wages. In fact, many accountants will make sure that their clients have maximized their C.P.P. and R.R.S.P. contributions for the year in order to ensure sufficient future retirement benefits, even if it costs a little more in income tax and/or payroll taxes.

On the other hand, the Dividend Tax Credit reduces the tax payable on dividends received from the corporation, since the corporation has already been taxed on its income. Therefore, the accountant may recommend that the corporation pay some dividends.

Sometimes, if the owner doesn't require the cash, the income is simply retained inside the corporation and tax is paid at the lower small business rate by the corporation. If the corporation had income in excess of the Small Business Deduction, it likely would pay it out in wages.

Depending on the circumstances of the taxpayer, wages may be the least expensive way of taking money out of the corporation. Sometimes, dividends are better. Generally, a mix of both is required.

An accountant will have to balance many factors to come out with the optimal mix for you. He will consider your family situation, other income sources, losses, investment and retirement objectives, et cetera. Keep in mind that the lowest possible tax bill for the current year is not always in your best interests.

RESOURCE BOX:

J. Stephen Pope, President of Pope Consulting Inc., http://www.popeconsultinginc.com/ has been helping clients to earn maximum business profits for over twenty-five years.

For valuable Work at Home Small Business Ideas, visit: http://www.yenommarketinginc.com/

For more information about income taxes, visit http://www.yenommarketinginc.com/income-ta xes.html

In The News:

The Tax Increases to Come  The Wall Street Journal
Tax the Patriarchy  The Atlantic
The Big Problem With Wealth Taxes  The New York Times

Income Tax Returns Your Accountant Should Not File

You've been feeling uneasy (perhaps even guilty) because you've failed... Read More

Tax Trap #3 -- IRS Penalties, Interest and Love Letters

As a small business owner or self-employed person, one of... Read More

IRS Offer-in-Compromise, Hype or Hope?

"Settle for Pennies on the Dollar! IRS debts settled for... Read More

Taxing Overseas Firms for SOX Compliance

The Sarbanes-Oxley Act, also called the Public Company Accounting Reform... Read More

Some Folks Pay A Lot Less Tax Than Others On Very Same Income?Did You Pay Too Much Tax In 2004?

Someone once remarked, "Next to being shot at and missed,... Read More

SFR Substitute for Returns: IRS Action on Non-Filers

In the latest Star Wars episode, the evil empire executes... Read More

Fraudulent Tax Shelters ? KMPG Goes Down Hard

In the largest criminal tax case ever filed, KMPG has... Read More

Home Based Business Tax Deductions

Running a home based business reaps many wonderful tax deductions... Read More

Get Uncle Sam To Pay $36,000 For Your Childs Education!

Let's assume that you would like to begin saving for... Read More

Military Reservists, Enlistees May Get Deferral of Back Taxes

Reservists called to active duty and enlistees in the armed... Read More

To Tax or Not to Tax - This is the Question

To tax or not to tax - this question could... Read More

About Income Taxes; Tidbits

1812The first attempt to impose an income tax on America... Read More

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their... Read More

Tax Reform, My Way

We need real tax reform and we need it now.... Read More

IRS Lock-In Letters ? What?s An Employer To Do?

Employers often ask employees to designate the amount of tax... Read More

Tax Trap #5 -- Ignoring The IRS (and the 5 best ways to contact them!)

We all love to criticize the IRS, don't we? And... Read More

I Havent Filed a Tax Return with IRS in Years, What Do I Do?

In elementary school, kids come up with creative excuses why... Read More

Send Your Kids To Summer Camp and Write It Off

If you paid someone to care for a child so... Read More

Tax Audits: What Signs Make You More Likely to be Audited by the IRS?

It's a major fear for most Americans: A notice from... Read More

Understanding Marketing Tax Deductions

Marketing is a necessary expense in running practically any business... Read More

How Home-Based Businesses Can Avoid Giving Uncle Sam More than His Share

How Home-Based Businesses Can Avoid Giving Uncle Sam... Read More

How to Reduce the Estate Tax Using the A-B Revocable Living Trust

In a past article I relayed the plight of the... Read More

Early Distributions From Retirement Plans

An early distribution from an Individual Retirement Arrangement (IRA) or... Read More

Donating Cars To Charity - New Tax Rules

On June 3, 2005, the IRS released guidance on charitable... Read More

Take Control of Your Taxes

As everyone in the U.S. knows, we have just passed... Read More