Over the past few years, CRA has embarked on a number of projects to deal with the way that companies pay their owners. In prior years, it was standard practice for companies to pay “management fees” to individuals who were shareholders of the companies. These fees were reported on personal tax returns as “self-employment income,” with the taxes and CPP paid when returns were filed. In other instances, these fees were also reported on T4A information slips, with no income taxes withheld.
There has been a change in CRA assessing policies and CRA has begun to enforce legislation that considers amounts paid to shareholder/officers of companies as remuneration from an “office or employment.” Therefore, if a person is a shareholder of a company and the minutes indicate that that person is the President, Vice-President, Secretary, etc., of the company, the CRA will no longer accept that amounts paid are self-employment earnings.
The effect of this position is that CRA wants that person on a “payroll,” with deductions at source for income tax and CPP. We have been involved with CRA on behalf of clients who did not have a payroll for their owners and CRA has assessed significant “failure to remit” penalties as well as interest on unpaid withholdings. We have limited success in getting relief for clients, and it is a time-consuming process for which there are professional fees.
As a result of CRA’s aggressive behaviour, we are recommending that companies begin paying shareholders through a payroll process. Alternatively, the company can pay dividends to its shareholder(s). We are advising clients that the appropriate way to reduce assessment risks is to declare dividends at the BEGINNING of the fiscal year and then draw against the declaration. In this manner, CRA cannot make a case that funds were “borrowed” from the company.
Contact Sloan Partners to review your specific situation. Our objective is to reduce the exposure to unfavourable tax assessments for you and your business.
Jerry Paskowitz is a Partner with Sloan Partners with over 30 years’ experience in all tax and financial matters. Contact Jerry (firstname.lastname@example.org) for an appointment to discuss tax savings opportunities and financial strategies for your business.