Owner-Manager Remuneration-Reimbursement of Business Expenses

by Sharon

Owner-Manager Remuneration Options

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?

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Hi Sharon,

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 decison.

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.

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Sep 26, 2013
Shareholder Transactions
by: Sharon

I have a client that has transferred money from the corporation's chequing account to I don't know where because the bank statement just shows a transfer to an account number but I have no supporting documentation from the owner.

He marked on the bank statement to post the transaction to the shareholder account. The shareholder account is set up as a liability account and is already in a debit position. I don't know if I should just post it here without knowing where the money was transferred and why.

In addition the owner has taken out random ABM withdrawal's. Again they are marked shareholder.

I am not sure if I should post all these transactions to shareholder or somewhere else.

Sep 26, 2013
Shareholder Transactions
by: Lake

Sharon, please reference my chat on Shareholder Loans. As the owner-manager is now in a debit position ... there are tax consequences. S/he needs to get advice immediately on how to proceed to avoid negative tax consequences. Feel free to refer her/him to my chat.

It is very hard for owner-managers to understand that they do NOT have free access to corporate funds ... especially if they used to operate as a sole proprietor.

In the interim, post the transaction to the shareholder account as directed.

Just as an aside. If funds are going to related parties, I initially set up a related party account as a sub-account of the shareholder loan ... so the accountant can decide best how to handle these transactions. I change/revise the chart of accounts based on the accountant's feedback.

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