Optimal mix of T4 & T5 income for owner of CCPC?

Tax Topics
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Firstly, I would like to wish everyone a happy and safe holiday. Also thank you to everyone who has commented and contributed over the past year(s) - it has been greatly appreciated!

*Technical question

Hello ProTaxCommunity,

How you go about finding the optimal mix of T4 & T5 income for the owner of a CCPC?

I’m aware T5 income does not require CPP contributions, T4 income builds RRSP contribution room and financial institutions prefer it when applying for things like a mortgage, etc.

In addition to the above considerations, how do you go about running the numbers to see what mix/blend of T4 & T5 income is optimal for tax savings?

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There is no easy way around it.

You need to do the actual calculations.

Roll-over your T1 file in planning mode and go through several scenarios.

Salaries will reduce corporate tax but potentially increases CPP and EHT payable (deductible to the corporation).

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I think there’s going to be varying responses but here’s what I’ve seen happen in my practice.

I have a block of clients who’s primary concern is to get a steady source of pension income when they retire. That overrides absolute “tax savings” for them. So we pay them the maximum pensionable earnings and the rest we dividend out.

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Depends on a mix of the size and net income of the corp and the owner’s desires.

Professionals tend to care about getting the lowest overall tax on earnings, so a calculated mix of personal and corporate tax vs net income before salary. They tend (at least in my practice) to ignore CPP (and some, RRSP). CPP is an expensive pension when you’re paying both sides of it. Many prefer to invest and self-fund retirement.

For corps with net income ~$40-60K you can generally get to 20% tax or so fairly easily and it doesn’t really matter how you mix it up. Max CPP, max RRSP where possible and go from there.

For incomes > $100K as Rein said, you just need to spreadsheet the calcs and run them in a variety of ways. Why? Because everyone has different personal situations, credits etc. There isn’t one generic way, other than looking, as above, at what provides the lowest overall tax paid for the year in the situation.

(Having said that, after a while one does develop a “feel” for what will likely work, but as the Feds keep tweaking DTC rates, RDTOH rules etc. it changes from time to time, usually painfully.)

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Not to mention completely moving the goalposts at will with the introduction of legislation such as TOSI, which feels similar to playing a real life version of Escape Room … :upside_down_face:

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If there was one, neat, tidy, one size fits all, they wouldn’t need us anymore. Keep movin’ the goal posts but please forget all this TOSI.

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I have run various scenarios over time based.

Scenario analysis in a single year.
Corporate T4 only.
Corporate T5 only.
Various splits of corporate T4 and T5 only.
Various splits of corporate T4, T5, and regular additional slips.
Various splits of corporate T4, T5, regular additional slips, pension split.

Scenario analysis run year over year - 2009 to 2019.

  • varies by year due to a combination of base rates and dividend tax credit changes.
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This is my corrected post. I am not sure why I can not edit my post above.

Whenever I look to understand an optimization and how the numbers pull, I run a scenario analysis by varying the parameters on separate tax returns, then comparing the tax and benefit effect of each scenario.

First I run these comparatives in a single tax year on a base case.

Then a vary a few additional factors in a single year such a single, married, retired, eligible dependent, income split, pension split, etc.

Then I run these scenarios over time which helps me to understand the tax changes year over year such as the major changes to dividend types and dividend tax credit.

I run these as John and Jane Doe - T4 only.
I run these as John and Jane Doe - T5 only.
I run these as John and Jane Doe - T4 + T5 split.
I vary the T5 amount to understand at which income level T5 income becomes taxable. This varied substantially over the past 10 years.

For a really full picture I add up all the taxes payable for the base scenario including payroll, corporate, and personal. Then I show the variances.

I also add up the cash flow variances from the base scenario.

After that I take into account how client specific income slips affect the taxes due when the same T4 and/or T4 corporate slip is added.

Only then, can a specific client situation be assessed from based on a taxes due criteria only.

In other cases a base level of T4 income may be required for personal loan, personal mortgage, and credit scoring reasons. In this case the a fuller financial picture is required.

At this point I do not see how this can be automated. Rather I see how valuable it is to run the scenarios well before tax season starts in order to understand the variables and the financial model that is in play.

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