Dividends vs Salary
Should I pay myself a salary from my corporation or should I take dividends?
This is a frequent question that we get asked by our corporate clients. There is always a correct answer, although the correct answer is more about the business owner’s personal financial circumstances, long-term financial goals, and beliefs rather than a pure income tax cost and savings question.
Paying a salary versus paying dividends from your incorporated business are very distinct and diverse in the outcomes for your personal and business income tax impact and long-term planning.
Pay a salary …
- You will be able to contribute to an RRSP.
- You will be paying into the Canada Pension Plan (CPP). Your CPP retirement pension is dependant on how long and how much you have contributed to the plan. This can be an important consideration in your long-term financial plans.
- The salary is a tax deduction to your corporation.
- Some disadvantages are:
- You will be paying both portions of the CPP as you will be the employee and the employer.
- Your business will need to remit the employee deductions to Canada Revenue Agency (CRA) each month. There are penalties for remitting these late. Annual T4’s are required to be filed with CRA.
Pay a dividend…
- Dividends are taxed personally at a lower tax rate than salary.
- Dividends are a return of capital to the shareholder; therefore, they are not deductible by your corporation in calculating taxable income.
- You will not be contributing to the Canada Pension Plan, so you will be saving some money.
- There is less administration cost with paying dividends as there are no payroll remittances due to CRA.
- Some disadvantages are:
- If dividends are your only personal income, you will not be able to contribute to an RRSP.
- You will not be contributing to the Canada Pension Plan so your long-term retirement plans will be impacted.
The decision to pay a salary or pay dividends is completely dependent on the business owner’s own personal financial circumstances. What is your income level? What are your cash flow needs? What is the corporation’s predicted income for the year? Is there RRSP room or other personal income tax deductions important? How old are you?
Because of the complexity of this decision, the salary or dividends decision is best made with professional advice. Priority Business Solutions Inc. can help you make the correct decision on matters like these.
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