In Canada, incorporated business owners have few options in how they pay themselves from the business. The two main choices we will cover here are salary or dividends.
In reality, there may be no right or wrong answer here. It comes down to personal preference to a large extent, but also in regards to the tax advantage, one is seeking. We will examine the pros and cons of either taking a salary or receiving it in dividends.
Taking a Salary
Here are the pros and cons of paying yourself from the business through a salary.
Receive a personal income:
Paying yourself a salary means you will be getting a regular paycheck which most people prefer over getting random dividend checks. Talk to Versatile Accounting for payroll services, this will help you to focus on business, and we will take care of all your payroll services.
Canadian Pension Plan:
You will have the opportunity to prepare for your retirement from your paycheck. Deductions will be made from your salary and contributed toward the pension plan.
Your business salary is 100% deductible business expense for your corporation. But always be sure to consult with your accountant to address any concerns about deductions.
You can also split your income by paying salaries to family members who also work in the business which allows you to keep your income from drifting into a higher tax bracket.
A salary allows you to be eligible for RRSP contributions. By participating in RRSP contributions, you can lower your taxes which will enable you to grow your RRSP investment for years to come and aid you in your retirement. Upon retirement, you may pay lesser income taxes as you most likely will be in a lower income bracket. Talk to us if you wish to contribute to RRSP as there are some restrictions with RRSP contributions.
Higher Personal Income Tax:
Though 100% tax-deductible, a salary income is taxed at a higher rate than a dividend income. If you want to see what impact it will have on your tax bill, Versatile Accounting can guide you in advance with some personal tax planning to save your taxes.
Paying Twice For Pension:
You will have to pay into the Canadian Pension Plan both as an employer and as an employee. By doing so, it may cost you more at first, but if you’re serious about getting your pension, it may be more of a pro than a con.
Must Do Payroll:
Any business salary paid must be done so through a payroll system. You will have to set up a payroll account with the CRA and file the necessary paperwork.
Business Loss Tax Issues:
Getting a business salary prevents you from carrying business losses in the years to come, something you can do if paid by dividends.
Here are the pros and cons of paying yourself from the business in dividends.
Lower Tax Rate:
Unlike a business salary, dividends get taxed at a lower rate, which allows you to pay less in personal tax.
You may declare dividends whenever you want, which could be an advantage for your business.
No Pension Contributions Required:
You do not have to pay into the Canadian Pension Plan (CPP), which can save you money. Talk to us if you still wish to contribute to the pension plan.
You do not need payroll processing companies here. To pay yourself dividends, write yourself a company check. Then, at year’s end, update the minutes, and draft a resolution.
A dividend income is not eligible for an RRSP contribution, but you can still take advantage of TFSA.
Some Deductions Not Allowed:
For example dividend income does not qualify as an earned income to claim child care expenses.
Dividend has flexibility in withdrawing money from a corporation. However, if you do not track your withdrawals, it will result in a higher personal tax bill for you in following April. Make sure you track your withdrawals and talk to your qualified accountant to avoid in advance for a high personal tax bill.
There are definite disadvantages as there are distinct advantages to either option. So weight the options carefully when choosing between taking a salary or dividends. We strongly encourage you to discuss your remuneration with a designated accountant. Versatile Accounting can help you with this, contact us today.