It's the eternal question for owner-managers: should I pay myself via a salary or a dividend? There is no clear-cut answer - the best option depends on each unique circumstance.
Salaries are deductible from taxable corporate income, whereas dividends are not. However, dividends receive preferential tax treatment on personal tax returns compared to salaries.
When we look at how much money stays with an owner after corporate and personal taxes are paid on compensation - either by salary or dividend - there is no significant tax advantage to one option or another, due to integration in most provinces.
However, a salary or dividend can impact your finances in other ways.
Salaries
♦ Increase your RRSP contribution room (up to the maximum limit each year).
♦ Require CPP deductions, which will provide access to the Retirement Benefit later on (as well the Disability benefit).
♦ Do not affect income-tested benefits (Canada Child Benefit, Old Age Security, etc.) as much as dividends.
♦ Can be used to lower corporate taxable income to maximize the Small Business Deduction.
♦ Are generally viewed more favourably by lenders when trying to obtain a mortgage.
Dividends
♦ Allow taxpayers to use the Dividend Tax Credit to lower their personal income tax.
♦ Do not require CPP deductions (can be beneficial if the owner has contributed enough to max out their benefits).
♦ Allow the corporation to recover its Refundable Dividend Tax On Hand account (if a balance exists).
♦ Are paid out of Retained Earnings, which makes more sense in years when an income deduction is not needed.
♦ Will affect income-tested benefits due to the taxable gross-up on amounts taken out of the corporation.
♦ Can allow for a tax-deferral advantage in some circumstances.
Our general approach is to pay salaries up to the CPP maximum pensionable earnings and then use dividends to cover any remaining compensation. With the total tax paid being roughly equal, we feel that increased RRSP limit and the future CPP benefits help clients plan for their retirement.
This article originally appeared in Southwestern Tax Service's November Newsletter: https://conta.cc/3FhmLYe
If you need more information about salaries, wages and dividends, contact one of our members.
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