What’s Best For Business Owners: Salary or Dividends?

bills-and-coins-in-red-envelope-sitting-on-a-tableIf you have chosen to set up your small business as a Canadian corporation, you have a couple of options when it comes time to pay yourself and any other company shareholders. You can choose to pay yourself a salary, receive dividends, or a opt for a combination of both. There’s no simple answer, so join Liu & Associates as we discuss the pros and cons of each option.

Business Salary

If you’re paying yourself a salary, the payments become an expense of the business. You’ll receive a personal income, and get a T4 at the end of the tax year.

The Pros

    • You’ll be paying into the Canada Pension Plan (CPP). The more you contribute to CPP, the more you’ll eventually receive once you hit retirement.
    • Your salary reduces the corporation’s taxable income, which reduces how much tax your business will owe each year.
    • When applying for a mortgage, banks like to see steady income. You’re likely to get a better rate if you have a salaried income vs a dividend one.
    • With your personal income, you’ll be able to take advantage of other investment opportunities such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).

The Cons

  • Your salary is taxable. It’s possible that giving yourself a salary could increase your personal tax burden.
  • You’ll have to do payroll. To keep things above board, you’ll need to set up a payroll account with the CRA and file all the necessary paperwork that comes along with such an account.
  • If your company’s profits vary from year to year, a salary could cause you tax problems down the road if you aren’t able to carry a business loss one year.

Dividends

Dividends are payments to shareholders of a corporation that are paid from the after-tax earnings of the company. Dividends are declared, and cash is transferred directly from the company’s account to a shareholder’s personal account. The business will need to prepare T5s for anyone who has received dividends.

The Pros

  • Dividends are taxed at a lower rate than a salary would be, which can result in paying less personal tax.
  • By not paying into CPP you’re keeping more money in your pocket today.
  • Transferring dividends is a pretty simple process! There’s no need to register for payroll – just declare a dividend and transfer the cash.
  • You can claim dividends anytime.

The Cons

  • By not contributing to CPP for as long, you will be entitled to less when you decide to retire.
  • Because you don’t have a personal income, you aren’t able to take advantage of RRSPs or TFSAs.
  • Dividends can exclude you from certain personal tax deductions.

Chat With An Expert

When it comes to deciding whether to pay yourself or other shareholders with a salary or dividends, it’s best to chat with a professional. Your choice will be impacted by a host of factors, like your current income level, your age, and the company’s projected income. An accounting professional will take all of this into consideration and help you draw up a plan for continued business growth and success.

For expert advice, call the team at Liu & Associates today.

 

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