Options of paying yourself from your Corporation: Salary vs Dividends

corporation salary vs dividend

Options of paying yourself from your Corporation: Salary vs Dividends

Salary vs Dividends

Many businesses that we work with always ask us what the best way is for them to pay themselves from their corporation. There are key differences between salary vs dividends.  It isn’t always an easy decision depending on your personal and business circumstances and goals.

Which one lets me pay less tax?

This is a question we get asked all the time when we work with corporations.  There is no right or wrong answer for this question.  We sit with our clients and ask them about their personal & business goals in order to determine which one is better or if a mix of both salary and dividends would work best for the shareholders.

We will ask you questions such as, “Do you ever want to buy property?”, “Is someone in your corporation able to stay organized when it comes to payroll responsibilities?”.

We will outline the important points between salary vs dividends and how you can have a combination of both that may satisfy all of your needs.

Salary

If you decided to pay yourself a salary (also referred to as ‘wage’), these payments will be an expense of your corporation and then personal employment income for yourself.  Your business will generate a T4 to you.  

Benefit: 

This will reduce your corporation’s taxable income which in turn reduces your corporate taxes that you will owe.

 

Things to think about:

  1. Your corporation will have to create a payroll account with CRA.  For each pay, the corporation will deduct CPP and Income Tax and will pay the remittance to the CRA on a regular basis.  For more information on how deductions are calculated, click here to use the CRA’s online calculator.
  2. The corporation will have to issue a T4 at the end of each year for any employees receiving a salary from the corporation.
  1. The employees will use the T4 for their own personal employment income tax.
  1. If you are receiving a salary, you will be able to build up your RRSP (Registered Retirement Savings Plan) contribution room, whereas, dividends will not assist you with this.
  1. Thinking of buying property?  If you are applying for a mortgage, it is easier to obtain when you can prove your steady income with a salary.  Dividends are less predictable, therefore, not favourable to the mortgage lender when applying for a mortgage.
  1. CPP Contributions have a pro and a con.  Though it is a benefit in the future when you collect CPP from the government, it is a cost to you now. Basically, you’ll get less cash now and more cash later.  Dividends don’t allow you to contribute to CPP.
  1. When you receive a salary, your income taxes are already being paid to the CRA through your corporations remittance payments on a regular basis.  This means that you won’t have a big lump sum payment to pay to the CRA at the end of the year for taxes like you would with dividends.

Dividends

A dividend is a payment of profits by a corporation to its shareholders. When a corporation earns a profit, a proportion of the profit can be paid as a dividend to shareholders.  Dividends are not a corporate expense and do not reduce corporate taxes that you have to pay.  However, corporate taxes are usually less than personal income taxes.

Benefit: 

Paying dividends to shareholders is pretty easy.  It’s basically transferring cash from the corporate account to the shareholders personal account.  At the end of each year, the corporation will file a T5s for any shareholders that received a dividend payment.

One thing to consider (which is not difficult) is that depending on how many shareholders there are and their percentage of ownership, the corporation will have to calculate the dividend payments accordingly.  For example, let’s say the corporation wants to issue $50,000 in dividends.  Maya owns 60% of the shares and Michelle owns 40% of the shares.  Maya would receive $30,000 and Michelle would receive $20,000 based on their percentage of ownership.  You would essentially have to make sure you track all of this carefully.  

If your corporation is setup to have different classes of shares, then it can get a bit more complicated but just send us a note and we can help you work that out and get a better understand of how that works.

Things to think about:

  1. It’s a lot simpler. Dividends are an easy way for business owners to withdraw money from their corporation. You don’t need to register for a payroll account and you just have to transfer cash from your corporate account to your personal account.  
  1. Besides the T5s that you have to file at the end of each year, you won’t have to deal with payroll deductions, remittance payments, pay stubs, etc.
  2. There are also Dividend Tax Credits that you are eligible for. This is a non-refundable credit that reduces the amount of tax you owe.

So, which one is it going to be? Salary vs Dividend?

Trying to compare what the personal income tax could be and what the corporate tax could be can be daunting.  There are personal tax calculators online that can help you figure out what you might pay in taxes and there are corporate tax rates that you can find HERE.

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.html

If you’re finding that it still isn’t clear to you, we can definitely help put it all together to show you which one might be better for your situation or create a combination of both depending on your personal, family and business circumstances.

Lastly, here are some scenarios you may want to think about when you’re comparing salary vs dividend:

  • Staying organized is very important for any business but opting to pay salaries is more work and requires a great deal or organization.  You don’t want to forget to pay the employees let alone forget to pay the remittance payments to CRA on time as they will contact you and charge you penalties if you are late.
  • If organization isn’t your strong suit or you don’t want to pay someone to take care of payroll, dividends are an easy payment you can make to yourself and the shareholders with minimal paper work.
  • For any financing needs you may have such as purchasing property, a car, a boat, etc. lenders tend to favour a steady salary as proof of employment over dividend payments.
  • The CPP deduction from salaries can almost be thought of like a savings plan.  You pay upfront but later on in life, you get that money back from the government.
  • If you choose salary, you do have the option to pay yourself a bonus but it could be complicated sometimes.  We can help walk you through how it would work for your situation.

 

Let us help you.  All of this information can be confusing and it can be a lot to consider.  Book an appointment with us and we’ll help walk you through everything to help you make the right decision between salary vs dividend.