Salary Vs. Dividends – How should I pay Myself from my Corporation?
The question that business owners have been asking themselves since the beginning of time!
The questions that will be answered in this article are:
“What should I pay myself, a salary or dividend?”
“What are the benefits of paying a Salary?”
“What are the benefits of paying a Dividend”
“What factors should I consider when deciding between a Salary or Dividend?”
But First – What is the actual difference between a Salary or a Dividend?
In a nutshell, there really isn’t that much of a difference! They both are just withdrawals out of the corporate bank account to your personal bank account. The way the differ is how they are treated on paper – a Salary goes on a T4 slip, and a dividend goes on a T5 slip and these generate differences between the two.
Paying a Salary
Pros
-Adds to your Canada Pension Plan(CPP) for your eventual retirement
-Adds to Registered Retirement Savings Plan(RRSP) contribution room
-Will receive a business deduction for the Salary
Cons
-Have to hold back and submit to the CRA “Source Deductions” – essentially need to pay the taxes upfront when you make salary payments
-More paperwork involved
Paying a Dividend
Pros
-Lower personal tax rate on Dividends, but don’t forget that you pay Corporate tax on dividends
-Not subject to CPP contributions so generally less expensive overall from a tax perspective than salary
-no source deductions and CRA remittances
-Less paperwork involved
Cons
-Doesn’t add to your eventual payments from the CPP
-Doesn’t add any room to your RRSP contribution room
So how do I decide how to pay myself?
The answer is IT DEPENDS! And it depends on your personal financial situation, and also your household situation.
Just a few Questions that can/should be asked/discussed with your Accountant:
- Are you close to retirement?
*Maybe a salary might make more sense to try and top up your CPP contributions for which you’ll eventually get paid out - How much is the business in a position to pay out to the owner?
*If the business and you aren’t making that much money, and just want the absolute cheapest option, then maybe a dividend might be right
- Will you be purchasing a home in the near future?
*Generating contribution room for your RRSPs is only achieved through a salary, so you might want to do that, and be able to take advantage of the first time home buyers
- Are you trying to deduct child care expenses?
*child care expenses are only able to be taken against “earned income” – Salary counts, but dividends do not
- Does your spouse have a healthy pension plan that you’ll be sharing upon retirement?
*You might want to save the money on CPP contributions then, and just pay a dividend as you’ll keep more money now
As you can see there is no right/wrong answer when it comes to how you should pay yourself, and the answer could lie somewhere in between, but at the end of the day it comes down to your personal financial situation and needs, so talk to your accountant as they can guide you in the best way to help you achieve your goals!
**Disclaimer
This article provides information of a general nature only. It does not provide legal/accounting advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific questions you should consult a CPA/lawyer.