How to pay yourself from your farm without hurting cash flow

How should you pay yourself from farm income?
In Canada, the right mix of salary, dividends and other compensation strategies can provide a fair personal income while protecting cash flow and long-term growth.

Paying yourself from the farm isn’t always straightforward, especially if your operation is incorporated. Take out too much and you could weaken the business; take out too little and you may shortchange your family and future financial security. The goal is to choose a compensation mix that supports both your household and the farm.

Salary or dividends: Which option fits your goals?

A salary creates RRSP contribution room and pensionable earnings, but it also requires payroll deductions. Dividends are paid from after-tax corporate profits and don’t create RRSP room or require CPP contributions. Many incorporated farm owners use a combination of both. The best approach depends on your cash needs, retirement plan, business structure and tax situation.

“With wages, you’ve got deductions – the big one being Canada Pension Plan (CPP) contributions,” says Mike Bossy, chartered professional accountant with Bossy Nagy Group in Tillsonburg, Ont.

“With dividends, you don’t have payroll contributions like CPP, so it’s important to set aside savings,” Bossy says. “That’s when I suggest a Tax-Free Savings Account (TFSA). Your investments can grow tax-free, subject to your available contribution room.”

For example, investing $5,000 annually for 20 years at an assumed 5% annual return would grow to about $165,000. Actual returns will vary, and TFSA contributions must stay within your available contribution room.

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