Salary Vs Dividends
Whether you pay yourself a salary or a dividend is a decision that every business owner is going to have to make. How you take income from your company can affect both your retirement planning and your taxes. There is no one method that will work for everybody, but here are some key considerations that could help you pick the method that is right for you.
One of the major benefits to taking a salary is that you have declared personal income. Having this income will allow you to contribute both to an RRSP and to the CPP. We recommend to successful business owners that there may be a better way than maximizing their RRSP contribution each year. A salary will create tax deduction for the corporation, which can help reduce any tax burdens the corporation may have. The downside of taking a salary is 100% of the income is taxable, often resulting in 40-50% of personal income tax.
The biggest appeal of paying dividends are that they are taxed at a lower rate than earned income. Dividends are taxed inside the corporation, allowing you to be paid in after tax dollars. Dividends qualify for a gross up percentage that reduces that amount of tax you pay when you receive them from the corporation. The downside of taking dividends without paying yourself a salary, and therefore having an earned income, you do not qualify to contribute to the CPP and to an RRSP.
The Bottom Line
There is no right or wrong way to pay yourself from your corporation. The decision depends on how you want to fund your lifestyle now and in retirement.
Questions to ask yourself are:
- What would my tax rate be on RRSPs and CPP in retirement?
- Should I take a larger salary to fund a large purchase and all lifestyle needs?
- Will taking Dividends help me save more in my company, simplify my financial affairs and recover refundable taxes on my investment income?
Our team along with your accountant and tax specialists can give you some guidance and advice that is specific to your situation, to ensure you pay yourself in the most tax efficient manner.