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Does a shareholder (who is owner/director) need to register for GST/HST?
Expert: John R Mott
I am a shareholder (owner/director) of my own company. Do I have to register for GST/HST, since the company invoices my clients for the services I perform for my company inclusive of GST/HST?
John R Mott answered:
This is a vital question for incorporated business owners. There are essentially only two ways to remove funds from your corporation. Your corporation may pay you a salary for services performed or your corporation may pay you dividends on its shares.
You cannot be an independent contractor with respect to your own corporation. As a director and officer of your corporation, you are an employee by definition. This means that your corporation, as your employer, has an obligation to withhold and remit payroll taxes on any amounts that are paid to you as remuneration. You may either set yourself up on a regular recurring salary, cash flow permitting, or you may receive periodic bonuses. Both of these are employment income, subject to payroll withholding taxes, that must be reported to you on a T4 slip at the end of the year. Employers who are delinquent with their withholding tax obligations are subject to harsh and escalating penalties, so it is critical to understand and comply with these rules.
Dividends are not subject to withholding taxes, but must be reported to you on a T5 slip at the end of the year.
Much is written on determining the most tax effective split between salary and dividend. These are a few of the relevant considerations.
Employment income and dividends are subject to different personal tax rates. Salary is a deduction to your corporation in determining its taxable income, whereas dividends are not. Dividends are paid out of retained earnings, which means that corporations that pay dividends must have taxable income, by definition, and must pay corporate taxes on that income. Salary is pensionable earnings for Canada Pension Plan purposes, whereas dividends are not. You must have pensionable earnings to be eligible to contribute to the CPP and you must contribute in order to eventually collect a pension benefit. In 2011, you must have salary of at least $48,300 to make the maximum CPP contribution. Salary is also earned income for RRSP purposes, whereas dividends are not. You must have earned income to create RRSP contribution room. In 2011, you must have salary of about $131,000 in order to make the maximum RRSP contribution.
About the author
John Mott is a chartered accountant and tax specialist with a private practice in mid-town Toronto. He provides tax, accounting and advisory services to individuals and small businesses. He may be visited online at: johnmott.com.