As the owner of a small business corporation, should I pay myself a Salary or Dividends?
Contents:
Introduction
About Salary vs Dividend transactions
Advantages of a Salary vs. Dividends
Why is Tax Planning important?
Conclusion
Introduction
In this Blog you will learn about salary vs. dividend transactions, advantages of both, and why tax planning of salary vs. dividends is important.
About Salary vs. Dividend transactions
Salary
If you are paying yourself a salary from your corporation, the payments then become an expense of the corporation. This means the salary will be reported as employment income and you will receive a T4 tax slip. The salary expense will reduce the corporation’s taxable income which will reduce corporate taxes owing.
Dividends:
Dividends are not considered a company expense and will not lower your company’s overall taxable income. They are payments to shareholders of a corporation that are paid from the after-tax earnings of the company. Dividends are investment income, hence a T5 tax slip must be prepared to report this income.
Advantages of a Salary vs. Dividends
Salary Advantages:
Salaries build RRSP contribution room
Salaries require payments to CPP; hence you receive a Canada Pension Plan when you retire.
Salaries paid on a regular payroll allow taxes to be withheld throughout the year, thus avoiding surprise personal tax bills, and making the tax burden easier to deal with.
When applying for a Mortgage, banks prefer to see a steady, predictable salary income.
Dividend Advantages:
Paying dividends removes the need to contribute to CPP, which reduces corporate and personal costs. The downside is that it does not allow you to contribute to the Canada Pension Plan.
The process is simpler, you just take cash out of the company and there is no requirement to withhold or remit tax on the payments.
Why is Tax Planning important?
Salary and dividend scenarios
It is important to have your accountant do tax planning salary and dividend scenarios to ensure that your corporate income tax payable, plus personal tax payable is minimized.
Conclusion:
In conclusion, as the owner of your corporation it is important to understand Salary vs. Dividends. This will ensure you meet your goals, objectives and minimize your tax.