While you can’t actually take a salary as a sole-proprietorship or partnership you can take one as an owner of a corporation. However, we can still look at your net income as a salary for the proprietorship or partnership, and you should not just write everything off so you don’t pay tax. You need to show some kind of an income for various purposes, such as loans, mortgages, etc. The taxman also likes to see some income eventually, as they may start to wonder how you support yourself.
Let’s talk about the taxman first.
While there’s no written rule about net income and when Canada Revenue Agency (CRA) will determine you’re not earning enough, you need to look at your net income over the years and see where it is. If you’re having continuous losses, as a proprietorship/partnership, CRA may start to wonder why you’re in business the first place. Plus, they may wonder how you live at all.
You may find yourself in the middle of a net-worth audit, where CRA looks at your income, what you own, what you owe, and how you survive financially. If there is a reason you do not need your business net income, such as other income, pensions, etc. you will have to prove that.
For the corporation owner, while your net income form the business doesn’t matter as much, CRA may look at what you take as income from the corporation. And, again, you could find yourself in a net-worth audit situation, if you aren’t taking any income. However, if you have a large shareholder loan (monies you’ve lent the corporation), and you’re paying this down instead of taking a salary, that will help with CRA.
Sadly, in the world of finance, not having an income is detrimental to getting any kind of loan. Banks do not understand being self-employed, and only want to see T4 income. That’s what they understand. If you are a proprietorship or partnership, you’ll need to be showing some kind of net income. How much all depends on what you’re going for, mortgage, car loan, etc.
For the corporation owner, you need to be taking some kind of a salary if you have a mortgage or other loans. As I said above the banks seem to only understand T4 income, so it’s best to take some kind of salary. The banks will not look at the monies you take out to repay your shareholder loan, as that’s money you’re owed by the corporation.
Let’s face it, in the end it’s all about us. You’re in business to make money and to earn a living, so your business needs to make money too. You need to be able to support yourself from your business earnings, without dragging the company into debt. This applies whether you’re a sole proprietorship/partnership or a corporation.
For the corporation owner, you can still claim an income even if the company cannot pay you outright. All you have to do is declare an income and pay the appropriate payroll deductions and you are good to go. Once the company has money you can pay this money to yourself. However, you must ensure you have the funds to pay the payroll deductions each month.
While you may want to not have to pay any taxes and take all the deductions you can, in the end, you can hurt yourself by not making money or taking a salary from your business. You need to live and support yourself.
Why Older Workers can be a Valuable Asset to Your Business
Should You Pay Yourself Salary or Dividends When You Incorporate Your Business?
The Personal Tax Filing Deadline is April 30th – Some Last Minute Reminders
Need Help With Your Return? Where to Get Answers to Your Income Tax Questions
What is CRA ReFile and How Does it Work?
What are Input Tax Credits?
What Happens if You File Your Income Tax Return Late
How to File Your Income Tax Return Electronically