Owner-Manager Remuneration-Reimbursement of Business Expenses
Owner-Manager Remuneration Options
I just took over doing the books for a client that is currently doing their own payroll. There is one employee (hourly/bi-weekly) and the President (salary/monthly).
The President does not issue a monthly cheque. I am seeing random ABM withdrawals throughout the month.
This has been very time consuming figuring out every month. Is this method of paying yourself a monthly salary acceptable?
In addition the President's wife has submitted expense reports to be reimbursed for business expenses paid with her personal credit card. All receipts are provided. Can she be reimbursed if she is not an employee or shareholder of the company?
Take a look at my chat on owner-manager remuneration
. Shareholders have to be VERY CAREFUL on how they withdraw money from the corporation. Doing it incorrectly could create a negative tax event.
There are generally four ways for an owner-manager to withdraw funds from the corporation:
1. By being on the payroll ... i.e. receiving a regular pay cheque (and the occasional bonus) which includes source deductions and regular remittance to CRA on employee payroll withholdings. This is recommended and there are benefits ... contributes to your CPP pension and increases your RRSP contribution limit. The expense is also a deductible business expense.
2. By dividends ... which is not allowed if there are negative retained earnings
... and cash must be available to pay it. Shareholders often take a portion of their income in dividends. There are some drawbacks to taking your income as dividends. Remember also that dividends need to be declared BEFORE they can be paid.
3. By shareholder withdrawals
... i.e. the shareholder loan
account has a credit balance meaning the company owes the shareholder money ... this is the closest a shareholder can come to the equivalent of a sole proprietor's draw.
4. By shareholder loans .. i.e. the shareholder borrows money from the company ... this method of withdrawal has very specific rules to follow including paying interest on the loan. This method of withdrawal creates a taxable benefit as well.
Key in "owner-manager remuneration" into Bookkeeping-Essential's search box and you will find other forum posts on the topic as well. Also search for "salary" and/or "dividends".
You might also like to read Jeff MacFarlane's article on the salary vs. dividends
It's my opinion that the best practice
is to issue regular paychecks to the owner and run all other withdrawals through the shareholder loan account ... which is hopefully in a credit balance position. I believe every business owner should have at least one frank discussion with their accountant on the best way remove corporate funds for THEIR SITUATION. Most bookkeepers do not have enough accounting, tax and business experience to advise their client's on this issue.
It is acceptable to reimburse the wife for legitimate business expenses that are supported with documentation. She is likely just helping her husband by running some business related errands for him.P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.