As unavoidable as it often is to keep personal transactions separate from their corporate accounts, Edmonton bookkeeping says that 80% of all entrepreneurs will do this in their business from time to time. Therefore, it is very important that business owners learn how to keep track of all of the amounts of money that they have both taken out of their business account for personal use, as well as all of the money that they have put into their business from their personal accounts.
The reason why this is so important to keep track of, is because a business owner and their corporation are actually considered to separate legal entities for tax purposes. All of the money that an entrepreneur takes out of their business as well as put in needs to be tracked, says Edmonton bookkeeping. The reason for this, is because at the end of the year, an entrepreneur with their accountant will calculate how much money they have put into their business subtracted from the amount that they have taken out. If the end up taking more money out of their business then they have put in, they need to declare to Canada revenue agency that they have taken money out of their corporation so that they can pay the appropriate taxes on it.
Business owners often wonder if they can avoid declaring that money. Edmonton bookkeeping says that while they can avoid declaring that money to Canada revenue agency, it is not advisable to have taken more money out of their business then they will put in because and overdrawn shareholders loan account actually is considered a long-term liability after one year, and Canada revenue agency may wonder why the entrepreneur is not paying interest on the money that they have effectively borrowed from the corporation. Business owners may be surprised to find out that Canada revenue agency the clawback that interest, and expect the business owner to pay all of the interest back on the overdrawn accounts. In order to help entrepreneurs avoid paying additional interest to their business and to CRA, they should avoid going the corporation any money.
If an entrepreneur has put in more money to the business then they have taken out, and that is an amount that they can take out of their business tax free. They should strategize with their accountant to figure out the best way to do that, in order to make the best use of taking tax-free money out of their business.
When entrepreneurs do personal transactions both into and out of their corporation, keeping track of it can help them keep a very clear shareholder loan account, that makes it easy to figure out how much money they have ended up taking out of their business, so they can strategize with their accountant on how to claim they have taken that money to Canada revenue agency to minimize the taxes that they eventually have to pay on those amounts.
Edmonton Bookkeeping | Keeping Track Of Shareholder Loan Amounts
When entrepreneurs take more money out of their corporation than they have put into it says Edmonton bookkeeping, the need to decide if they are going to be claiming that they have taken the money to Canada revenue agency through salary or through dividends. This can be a complex issue, and often requires help from an accountant to review both their personal taxes and their business taxes in order to determine how entrepreneurs should claim the taken that money.
The two options that entrepreneurs have on how they are going to clear that they have paid themselves, is either salary or dividends. Entrepreneurs should understand the difference between the two, so that they can help understand why you need to make this decision with an accountant. A dividend is the amount of money that the business has profited, and therefore will distribute. Dividends end up showing on the balance sheet of the business, and not the income statement. Since it is a way of distributing the earnings of the corporation, it is not considered a liability and it does not affect the bottom line of the business.
Salary on the other hand, is considered an expense of the business, says Edmonton bookkeeping and therefore does decrease the bottom line of the business. It can minimize the look of how profitable the business is, and if an entrepreneur is going to sell the business, that can negatively impact how profitable the business looks to an investor. Also, by declaring salary, an entrepreneur also has to pay the appropriate source deductions on that amount as well. This includes income taxes, the employer and employee portion of CPP as well as EI on entire amount of salary that they claim.
Salary and dividends get taxed differently, and in addition to understanding what each of them is, and how they affect the financial statements of the business, accountants also have to take into personal factors of the entrepreneur in order to finish making the decision says Edmonton bookkeeping. They will be asking the entrepreneur questions such as if they have any other sources of income, to they penned on the corporation to support their household, are they the sole owner of their corporation or do they have business partners, and if so what percentage of shares do they hold? All of those various factors go into helping an accountant to come up with an efficient strategy of how an entrepreneur should claim that money.
At the end of the decision, an entrepreneur will have an efficient tax strategy, claiming a percentage of the amount that they have taken from their business as salary, and a portion as dividends. The most efficient tax strategies are rarely 100% salary or a hundred percent dividends. By coming up with a great strategy, business owners can ensure that they are paying the minimal amount of taxes possible on the money that they have taken out of their corporation, in order to positively impact their business and themselves.