Dotting Your T’s & Crossing Your I’s
Even though your corporation will be set up legally, for Canada Revenue Agency to accept the corporation as a valid entity, here are some tasks that will need to be carried out:
- setting up a corporate bank account and ensuring all revenues are deposited into this account and expenses paid from this account
- changing pre-authorized debits or credits that relate to your professional activities from your personal bank account to your corporate bank account
- establishing a fiscal year-end for the corporation
- notifying the Canadian Medical Protection Association (CMPA) of the incorporation
- notifying other relevant institutions of the incorporation, such as the Workers’ Compensation Board of Nova Scotia
- ensuring proper employment agreements are in place
- notifying suppliers of your incorporation
- making sure all company documentation (business cards, brochures, letterhead, etc.) shows the name of the corporation
- ensuring the corporation’s name is displayed prominently on the premises
- setting up a record-keeping process to keep track of business activity
Salary vs. Dividends
Both have advantages and disadvantages
Once incorporated, you have the option of paying yourself a salary or dividends—or a combination of both.
What are salaries and dividends?
A salary is an expense paid by the company and relates to services performed by an employee of the company. A dividend is a distribution of after-tax corporate profit and is payable to shareholders of the company. The amount of the dividend does not have any relationship with work performed by the shareholder. It is based solely on shareholdings.
How much of a salary should I pay myself?
The salary the company pays you can be any amount. No amount is unreasonable. The general rule is to pay yourself a salary when the company’s income is greater than the Small Business Deduction limit of $500,000. The corporate income tax rate ranges between 13% and 15% for income below this limit and increases to approximately 30% on income above this limit. In Nova Scotia, a company earning more than $500,000 after expenses would generally pay you a salary to reduce the company’s income down to the $500,000 mark.
When should I pay myself dividends?
Dividends are generally paid out of income under the $500,000 income mark if more personal cash is needed. This general rule produces lower income taxes.
What are some other things I should be aware of?
Other important considerations include:
- The salary level you are paying yourself may be less than the amount required to maximize the RRSP contribution limit and or maximize CPP pensionable earnings.
- Paying yourself a minimal salary reduces the benefits of an individual pension plan.
- Dividends leave saving for retirement up to you. Discipline is a must as there aren’t any forced-saving mechanisms.
What are the advantages of paying a salary to a spouse?
If your spouse is not earning income from any other outside sources, paying them a salary not only saves you taxes, but it gives your spouse an opportunity to make RRSP contributions if that is desired.
What is a reasonable salary?
If you pay your spouse a salary, the salary must be reasonable and will likely be scrutinized by a tax auditor with Canada Revenue Agency. Salaries paid to spouses (and family members) tend to be for administrative services, so the amount paid out must be similar to what a doctor would pay a non-family member to carry out the task.
If I am paying my spouse a salary, what are some other things I should do?
For the salary arrangement to be reasonable, you should:
- set out the terms of the relationship in a written employment agreement
- put your spouse on the payroll, make payroll deductions for them and issue them regular cheques—treat them like any one of your other employees
- pay the salary. Remember, an employment agreement provides a legal basis for paying that salary.
What is the benefit of paying dividends to my spouse?
The advantage of paying dividends to your spouse is that the amount paid does not have to be reasonable. Simply put, the dividend can be for however much you want it to be.
What about salaries or dividends for children?
If your child (or children) work in the practice, the same rules apply for the salary of a child as they do for a spouse. One downside is that because children can only likely work part-time hours, this limits the amount of income you can split with them. Paying dividends and receiving no services in return is also an option. However, you may want to set up a family trust as this will let you keep control over the shares of the company and the income that is transferred from the corporation to the trust. Generally, it is not recommended to give dividends to children until the year that they turn 18 years of age. If your child turned 17 last year, your company can start paying them dividends this year.
What is the best approach for income splitting?
Usually, the best approach involves some combination of salary and dividends. Flaim Wolsey Hall can help you determine what the most effective scenario is for you. Your Flaim Wolsey Hall advisor would be pleased to discuss any of the above matters with you.
Proposed rules that are scheduled to be effective January 1, 2018 may substantially reduce the ability to income split.
Simple tips for managing your incorporated company
Once you have incorporated your medical practice, there are certain responsibilities to uphold in maintaining your company’s accounting books and records. You must keep these books and records for six years from the date Canada Revenue Agency (CRA) has issued a Notice of Assessment for the tax returns these records relate to.
What is a year-end date?
One of the first things you will have to do after incorporating is select a year-end date for your company. Your accounting records will be organized to end on that date for each particular year. From these accounting records, financial statements and income tax returns are prepared for the company. (The year-end date is to a company what December 31 is to a personal income tax return.)
Generally, the year-end date is the last day of the month of any month subsequent to the date the company was incorporated. The year-end date cannot extend beyond 371 days after the incorporation date. Once this year-end date is selected, the company retains this year-end date for future years. You can change the year-end date later, but you will need to request permission from CRA and have this request approved.
Should I use bookkeeping software such as Simply Accounting or QuickBooks?
These pieces of software are used by companies that have a significant number of transactions each month. For most doctors who incorporate their medical practice, the number of transactions that occur in any given month is usually minimal. For this reason, most doctors do not use bookkeeping software.
Most incorporated doctors obtain a bank account and a credit card in the name of the company to keep track of their revenues and expenses.
How should I keep track of my revenue and expenses?
- set up a chequing account: on your bank statement, write a description of the revenue or expense if it is not easily apparent
- set up a corporate credit card: on your credit card statement, write a description of the expense if it is not easily apparent
- hold on to your various statements and receipts: Flaim Wolsey Hall provides you with pre-labelled folders to help you set up your filing system. Throughout the year, just place the statements and receipts into the appropriate folders and then approximately 15 days after your corporate year end, bring the folders in and we’ll take it from there.
What if I pay my corporate expenses personally?
If you pay for your corporate expenses using your cash or personal debit or credit cards, you should:
- place the invoices and receipts in envelopes. Be sure to add a description if it is not readily apparent what the invoice or receipt is for
- if you have made any reimbursements, note the details on the outside of the envelopes