Finance: When it’s time for a little payback
Degrees, certifications, a diligently-built engineering practice and a lot of hard work —you’re proud of what you’ve achieved and where you are. But let’s face it: you want to make sure you take home as much money as...
Degrees, certifications, a diligently-built engineering practice and a lot of hard work —you’re proud of what you’ve achieved and where you are. But let’s face it: you want to make sure you take home as much money as possible for your efforts. Figuring out how to do that while ensuring long-term prosperity can be difficult. You chose to operate your practice through a professional corporation, which is a solid platform for maximizing current cash flow and sustaining it over time. However, what’s the best way to extract cash from an incorporated professional practice? How can that business model yield the best short- and long-term payback for you?
In Canada, you have essentially three options. Which one you choose depends on your answers to five key questions and the personal remuneration profile those answers will help you create.
Answer five key questions to create your remuneration profile
To develop a remuneration strategy that serves your financial needs throughout your life, an accurate remuneration profile is crucial. Ask yourself:
– How much money do you need to live on now?
Look at the full range of your lifestyle and cash flow considerations. If you can live comfortably on less, you free up cash for the future. Also assess whether you’re a spender or a saver and take your marital status into account. Try to balance current needs against future expectations.
– How are you planning for retirement?
Knowing how much you need to retire and how you’re going to save is important. Assess how much you are spending now and consider your existing retirement strategies — RRSP pools, non-registered funds, leaving funds in the corporation, etc.
– What are the regulations governing the practice of engineering in your province?
Are you aware of specific regulations within the engineering profession? Understanding, consulting and staying up-to-date on the engineering professional practice and qualifications guidelines is critical, as they may place restrictions on your ownership structure which will then impact your optimal remuneration plan.
– What are your plans for your professional practice?
– As much work as you’ve put into it, you want to carefully consider what will happen to your practice in the future. There are many succession planning factors that could impact the value of your company.
– In which province(s) are you incorporated?
Tax rates and dividend rates differ from province to province, so the optimal strategic mix within your tax structure depends partly on where you live. Also be aware of any taxes that are unique to your province.
Answer these questions clearly and thoroughly, and the resulting profile will provide a strong basis for selecting one of the following remuneration strategies.
Salary, dividends or a combination strategy?
There are choices—you can take money out of your professional corporation in salary only, have it paid out in shareholder dividends or implement a strategic combination of the two. Each option offers different advantages and drawbacks. For example, the all-salary option favours RRSP contributions, but imposes a double pay-in (as both employer and employee) on CPP, while an all dividend structure may lower your marginal tax rate but entirely eliminate your ability to contribute to RRSPs and CPP. On the other hand, choosing an all dividend option may reduce your total tax payable (depending on provincial dividend rates), but an all salary option will help you manage your taxes through ongoing source deductions.
Combining and balancing the pros and cons of salaries and dividends is often preferable and can open up a variety of end-strategies. For instance, some professionals will pay a salary up to the point where their RRSP contribution room is maximized, then switch to more tax-efficient dividends. With other factors such as cash needs and spousal income involved, remuneration optimization becomes a real challenge, so it’s time well spent to understand and review the alternatives.
Get what you need — and what you want
When it comes to taking money from your professional engineering corporation, there’s no single perfect solution. Whichever remuneration structure and strategies you choose will affect your lifestyle, your corporation and your future. It can be complex, but if you ask the right questions and seek advice from an experienced adviser, you can help keep your hard-earned dollars where they should be — either in your pocket now or waiting for you down the road.
Kelly Kolke, C.A. is a partner and national leader of professional services with Grant Thornton LLP. He is based in Nova Scotia. E-mail Kelly.email@example.com.