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Khushboo Jha initially followed the advice of other financial technology entrepreneurs who recommended that she not take a salary - but then found it wasn't the best solution for her.Peter Power/The Globe and Mail

As the founder of a venture-backed start-up, Khushboo Jha had to make a difficult decision about how to pay herself early on in her entrepreneurship journey.

“When we started, we had already raised a funding round, so there was a means to pay myself if I wanted. There was capital in the company, so the questions became: What do I pay? How do I pay? And what are the implications?” says Ms. Jha, founder of BuyProperly, a Toronto-based platform for fractional investing in real estate.

The choice of whether to pay yourself using dividends, salary or a combination of the two is one many entrepreneurs face – with potentially far-reaching financial implications for both the individual and the business.

When Ms. Jha founded her company in 2019, she initially followed the advice of other financial technology entrepreneurs who recommended that she not take a salary. But pretty soon she ran into a problem.

“Financial institutions don’t want to be in business with you if you have no salary to show,” she says.

To ensure her financial standing didn’t jeopardize her financial partnerships, Ms. Jha began paying herself a regular salary in January 2020. But when the pandemic began in March, keeping cash in the business suddenly became critical.

“That’s when I moved to a dividends-plus-salary model; because the dividends piece is more discretionary and I could manage it better based on the business’s health,” she says.

“It gave me the ability to play with how much I can pay myself without an upfront commitment, while giving myself a minimum salary for the rest of the year, to show there’s something coming into my account.”

The hybrid approach allowed Ms. Jha to demonstrate a regular income to financial partners while maintaining the ability to adjust her compensation based on the business’s performance. While it’s proven effective for her, experts warn that there is no one-size-fits-all solution.

“Especially if you are the sole owner of a corporation, you need to figure out what type of payment model works best for you personally by asking yourself, how do I need to be paid?” says Susan Watkin, an accountant and spokesperson for TurboTax Canada.

However, the ability to choose how you are paid is only applicable to corporations, Ms. Watkin explains, meaning sole proprietors and self-employed individuals cannot pull a salary or dividend from their business. Getting a grasp on your unique situation is the first step toward ensuring the best financial and tax outcome, whether you’re navigating solo as a self-employed individual or working alongside experts.

For example, Ms. Watkin explains if you need to grow your registered retirement savings plan (RRSP) contribution limits, or you need a T4 in order to apply for a personal loan or mortgage, this will determine how you need to be paid from your corporation. Those who forgo employment earnings from a corporation, like a salary, won’t receive a T4. Employment earnings are earned income that helps determine the growth of your RRSP contribution limits. Again, this only applies to corporation owners, not sole proprietors and self-employed individuals.

“Now you have to look at the considerations for your business,” Ms. Watkin says. “Things like payroll and payroll expenses, those impact the corporation’s bottom line, the performance of the business. When an owner receives a salary, it reduces the corporation’s overall profitability, since it is an eligible business expense.”

Furthermore, while tax rates are typically lower for small business owners who are paid a salary, “that only tells half the story,” according to Robert Bradburn, general manager and assistant vice-president at CWB Insurance Solutions, a division of CWB Wealth Management.

He notes that in every province and territory – other than Saskatchewan and the Northwest Territories – tax rates are slightly lower for those who are paid via salary instead of dividends, but often by only a fraction of a percentage point.

“You’re going to be nearly even regardless of taking salary or dividends, so you have to look at the other factors, like creating RRSP contribution room, or making the CPP contribution, or having an income splitting strategy,” he says. “You would also want to consider the other sources of wealth in your household, because there is an advantage to leaving money in the company.”

Personal factors such as the entrepreneur’s age, retirement plan and household income can also play a role in how to best pay themselves out of the business. Other factors include the size of the business, its corporate structure, succession plan and overall income.

For sole proprietors and self-employed individuals, Ms. Watkin points to TurboTax Online Self-Employed, a tax solution for people who have personal and business income and expenses as part of their tax return. While using this solution, users will be asked questions to ensure they’re providing all their eligible claims as a self-employed person.

“To remain on top of the shifting landscape, TurboTax Assist & Review or Full Service Self-Employed are great options for sole proprietors and self-employed individuals who want the help of a real tax expert,” she says.

Even after arriving at a compensation structure that best suits their needs, Ms. Watkin says entrepreneurs should be prepared to adjust it as the business, their personal financial situation and tax rules evolve over time.


Advertising feature produced by Globe Content Studio with Intuit. The Globe’s editorial department was not involved.

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