Why Canadian Business Owners Should Never Pay Themselves a T4 Salary
As an incorporated business owner in Canada, you have a choice in how you pay yourself – either a T4 salary or a T5 dividend. We caught up with John Moakler, President and Senior Executive Financial Planner at Moakler Wealth Management, to hear about why they should NEVER pay themselves a T4 salary.
What? Never pay yourself a T4 salary? Whatever do you mean?
If you pay yourself a T4 salary of $60,000 or more annually, then you are fully paying your employee portion into the Canada Pension Plan (CPP) and your business is paying the employer portion into the CPP. In other words, you are paying double into the CPP.
This means that jointly you are contributing approximately $6K-$7K per year, and if you do this over a 30-year timeframe, you would have paid $180,000-$210,000 into CPP without any return on your investment.
That’s right. You will NEVER get 100% back of what you put into CPP.
For example, if I was able to offer you two options, which one would you take?
Option #1: You get $264,000 or $292,000 of CPP income, all of which is taxable and none of which will go to your estate.
Option #2: You get $418,000 of tax-preferred or even tax-free money, and it will result in an estate for your beneficiaries.
Let’s drill down on that.
The current annual CPP for someone age 65 is $13,900 per year. No, not all all Canadians are at this level, but we will use it as our basis.
The average life expectancy for a Canadian male is age 84, and for a female it’s age 86.
In Option #1, if you start accepting CPP payments at age 65, you would get approximately $264,000 by the time you turn age 84 ($13,900 x 19 years), or $292,000 by age 86 ($13,900 x 21 years). But 100% of that income is taxable!
If you pass away early, you will receive less money, although it will rollover to your spouse on a tax-free basis. But when your spouse passes away – unless you have children dependent upon you – your CPP is gone forever.
But what about Option #2? What if you didn’t have to contribute to CPP?
Then you could take your $6,000 per year and invest it into a conservative portfolio with an average annual return of 5%. After 30 years, it would be worth $418,000.
If the $418,000 is in a non-registered portfolio, then it is only 50% taxable on the capital gain. And if the $418,000 is in a TFSA, then it is 100% tax-free money. Wow.
Make sense? Instead of paying yourself a T4 salary, you should pay yourself a T5 dividend income. By doing so, you are exempt from contributing to the CPP.
Now you are in control:
- you can withdraw money on your terms
- if you pass away early, the money will rollover to your spouse
- when your spouse dies, there is an estate for your beneficiaries
So back to my question. Which option would you prefer?
Option #1: You get $264,000 or $292,000 of CPP income, all of which is taxable and none of which will go to your estate.
Option #2: You get $418,000 of tax-preferred or even tax-free money, and it will result in an estate for your beneficiaries.
Option #2, of course! As an incorporated business owner, contributing into the CPP is a negative return on your money. So NEVER pay yourself a T4 salary!
Business owners: This is just one of the secrets from my MasterClass,The 6 Secrets: What Every Business Owner Must ALWAYS and NEVER Do With Their Corporate Cash Flow. Want to see a live illustration of this Secret and the 5 others? And get some great bonuses? Just watch here: http://bit.ly/2JiIpnK
John Moakler, BMath, CFP, CLU
President and Senior Executive Financial Planner
Moakler Wealth Management, Inc.
info@moaklerwealthmanagement.com
