How To Pay An Owner-Manager

Regular salary to an owner-manager is easy for the payroll department to record, but when a payment is made to an owner, a process needs to be in place to ensure proper recording. Identifying the nature of the payment is very important to its proper recording.

Communication between ownership/management and the payroll department is necessary to determine the payments structure.

For example: a drawing from a shareholder account has no impact for the payroll department whereas a payment for salary does have an impact. Proper recording is important to ensure the accounting records are maintained properly and to ensure that tax treatment is optimized.

An owner/manager may take his or her compensation in varying ways and may not take a regular salary if cash flow does not permit or if the receipt of a dividend is more efficient from a tax perspective.

A salary is usually paid to an owner or manager to allow a regular flow of earnings. Payment of a salary creates contribution room for an RRSP because salary is earned income for RRSP purposes, maximizes CPP contributions and permits the deduction of child care expenses, if applicable.

How do the Statutory Deductions Work When I am Paying an Owner or Manager?

The statutory deductions for regular payments to owners or managers are the same as regular employees, except that an owner must meet certain criteria to be covered by employment insurance.

Withdrawals that are charged to a shareholder loan account and dividends are not subject to any withholding.

At the end of the year, payments for regular salary, commissions, employee RPP contributions and employer RRSP contributions are to be recorded on a T4 slip.

Dividend distributions should be recorded at the end of the year on a T5 slip.