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Should I Pay Myself a Salary or Dividends?

Should I Pay Myself a Salary or Dividends? - Cook and Co - Accountants in Calgary - Featured Image

If your business is set up as a corporation, you can choose to pay yourself a salary, receive dividends or a mix of both. It makes sense to choose the method that best accommodates your financial situation, but which practice is most beneficial for your business? There are many factors to consider and each payment method has advantages and disadvantages.

 

Salary: a fixed regular payment, made on a monthly or biweekly basis by an employer to an employee.

 

Advantages:

  • provides a legally recognizable personal income
  • allows you to contribute to retirement funds (CPP & RRSPs & TFSAs)
  • is tax-deductible for your corporation
  • fewer surprise taxes
  • easier to apply for bank loans and mortgages and often a better rate
  • entitles you to a Canada employment credit
  • can reduce exposure to corporate income tax

Disadvantages:

  • must set up a payroll account
  • pay twice into retirement funds, as the employer and the employee
  • a salary is 100% taxed, which could increase your tax burden
  • you won’t be able to carry back a business loss in future years when profits vary

 

Dividends: a sum of money paid regularly by a company to its shareholders out of its profits or reserves.

 

Advantages:

  • are taxed at a lower rate than a salary
  • can be declared at any time allowing optimization of your tax situation
  • save money, no CPP payments
  • simple process and little paperwork
  • don’t require payroll account
  • less chance of payroll penalties
  • do not require the shareholder to be an employee of the business

Disadvantages:

  • reduces the amount of CPP you are entitled to receive when you retire
  • you are not able to contribute to an RRSP
  • prevents you from claiming personal income tax deductions, such as childcare costs

 

Mix of both:

  • a business salary and some dividends are sometimes paid to ensure a corporation doesn’t earn over $500,000, the small business limit in Canada after which the tax rate increases
  • deciding to receive a salary and some dividends is based on income level, cash flow needs, projected annual earnings, the importance of personal cash for investments/tax deductions and/or the business owners age

As a business owner/manager, you can pay yourself a salary, dividends, or a mix of both. Whichever method you choose will depend on your personal and business needs and is best made with professional advice from your accountant.

Not sure whether a salary or dividends are best for your corporation, contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.

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