don’t deduct any tax (technically, it is NOT a required deduction vs salary, but if you DO deduct it, you MUST remit it). Client simply pays instalments.
Run a T1 for your province using a test file with similar characteristics to your client…you’ll get a tax amount. Deduct and pay it. (FWIW I find it useful to always have “Single” and “Married” tester files each year.)
Take a guesstimate (say 20%). Will it be “close”? Yes.
Edit: I wouldn’t bother keeping separate GL entries for CPP1 and CPP 2. There’s little point unless your GL software doesn’t also generate T4s from manual payroll entries.
If it’s a bonus on top of other salary, you want to divide the bonus by the number of pay periods, find the change in tax deductions that would result from adding that amount to the salary, and then multiply that difference by the number of pay periods. Also make sure not to deduct too much CPP.
Thanks for sharing your experience. It’s weird when CRA states that they can penalize you for failure to deduct. I’ll just chalk this one up to inconsistent CRA treatment.
“don’t deduct any tax (technically, it is NOT a required deduction vs salary,”
It may be that the reg 102 calculation computed to zero in specific cases, or maybe the CRA auditors have been feeling generous.
The Income Tax Act appears to provide a different technical answer.
Section 153(1)(a) requires the payor to make a tax withholding deduction from such a payment of bonus pursuant to prescribed rules (See the Regulations (102))
Section 227(8) provides for the penalties against the payor for failing to deduct or withhold pursuant to Section 153(1).
This is where I get confused. For now, this is a ONE TIME bonus payment to the owner. No other salary etc.
Most of this payout will be used to offset the Shareholder loan.
In the PDOC, I do the following:
Salary
Ontario, Frequency?? I don’t know what to pick so I just do biweekly (26weeks) and date employee is paid??? (i used today)
$1 for salary
Bonus payment of $81,890
EI Exempt
This result shows me $15,097.81 in taxes (combined), only $291.64 in CPP2 - which I know is incorrect
If I redo this and put $81,890 as the salary payment and zero for bonus, the I get CPP1 (4230.45) and CPP2 (291.60) but the taxes payable are $41,534.34 (combined)…something is not clicking for me
I’m a total newbie but I think you’re talking about an owner of a corporation? In that case, would it be easier to give them a dividend? T5 and no payroll expenses (IIRC)
this in general is always a hot topic (T4 vs T5). I personally prefer the T4 route as my recommendation to clients. Lots of long term benefits that most business owners won’t understand (CPP/RRSP etc.)
But you can do both. T4 for what they want to withdraw annually and T5 for the bonus. Double check if their docs allow bonus as dividend. If they have a bunch of people sharing same class of shares, they all have to share in the dividend. Then it’s not really a “bonus” for the one person who deserved/earned it.
Bear in mind that I’m a complete newbie. Here’s my thinking: a bonus on a T4 is treated like regular income with taxes and CPP. Your bonus is high enough to push the owner into new tax category. CRA recommends higher tax withholding to account for that.
For owners of corporations, the tax preparer can give them a spreadsheet which shows corporate tax plus personal tax to give them the biggest picture. The spreadsheet should include CPP and the employer CPP which is pure tax. That is, it does not double what CPP the person is entitled to. If a spouse owns shares, their taxes should be calculated as a family. Try 100% salary + bonus vs salary and dividend. Also salary alone and keep extra in corporation? Most people incorporate because their companies earn more than they need to live well
this client of mine just takes money out of the corporation as needed via shareholder loan. Then typically they do a T5 but this year they missed the deadline and didn’t want to pay the late fee for the slip. I explained the T4 - bonus route and the future benefits and they liked it.
Ok, makes total sense. But I think the PDOC is right. Bonuses are taxed like regular T4 pay and now owner is in higher marginal tax because of large bonus. They’ll get a refund next year so not too big a deal unless they planned to use the bonus for a specific expense. In that case, they may have to take out more to account for the taxes. This may not be feasible if the corporation is already funding a shareholder loan. Sometimes owners must be told their corporations are not piggy banks. Remember Conrad Black!
For each province there is an optimum mix of salary / dividend. You need to be aware of that (admittedly approximate) line when doing your work first. Second, the owner of a corp is paying DOUBLE CPP…because the corp pays half. This is not insignificant either. High earners don’t often care about CPP and will eschew paying salary in favour of dividends (I’ve had a number of these…and by retirement they are usually easily self-financed).
It’s not straightforward all the time, but by the time someone is end-played (like OP…past slip-filing date, although it’s a measly $100 for T5s, but more costly for T4s, with CPP) there is little choice but bonus/repay.
Nobody at CRA is going to give a tinker’s hoot if you don’t deduct enough tax. Your client may, or may not, care. There is NO “exact” calculation for anyone…all tax calcs for salary are approximated in any event. Make sure you deduct enough CPP/CPP2, approximate the tax and notify the client that it’s an approximation, pay, and remit. Done.
I just filed my first T5 for a one shareholder corporation. What I am not sure of is where to claim it on the T2? This T5 was to cover the shareholder loan - not sure how to record it?
Suspect you need professional assistance. This is something any competent accountant would know. Save yourself a world of potential pain with mistakes that non-professionals generally make and CRA is delighted to find.