One of the most common questions that I get asked by entrepreneurs who are shareholders in a corporation is whether they should pay themselves a Salary or Dividends. The answer depends on a number of factors include the business owner's own personal financial situation, the corporation's predicted income level, the amount of RRSP room available to the business owner, and other personal income tax deductions. Therefore, the purpose of this blog post is to provide a general overview of the topic of Salary vs Dividends, so that you are able to have an informed year-end conversation with a professional accountant.
Paying yourself a Salary
When you choose to pay yourself a salary from your corporation this is paid with before-tax dollars and there are a number of Pros and Cons which are associated with this decision.
+ A salary is considered "Earned Income" and thus creates RRSP Contribution Room at a rate of 18%.
+ You will be making CPP contributions which will accumulate over your career.
+ The salary paid out is a deductible expense for tax purposes for the corporation.
- A salary is 100% taxable at your combined marginal personal income tax rate (i.e. starts at 26%).
- You have to pay both the employee (4.95%) and employer (4.95%) portion of CPP for a combined 9.9%.
- When you pay yourself a salary, you are required to calculate payroll and set-up a payroll account with the CRA.
Paying yourself a Dividend
When you pay yourself a dividend from your corporation this is paid with after-tax dollars from the corporation's retained earnings and there are a number of Pros and Cons which are associated with this decision.
+ A dividend is taxed at a lower personal tax rate than a salary, which can result in you paying less personal tax.
+ You don't have to contribute to CPP when you pay yourself a dividend.
+ Income splitting through dividends can be achieved with two or more shareholders (i.e. husband and wife)
- A dividend is not considered "Earned Income" and thus it doesn't create RRSP Contribution Room.
- Paying yourself a dividend instead of a salary won't let you take advantage of certain non-refundable tax credits.
- The dividend paid out is not a deductible expense for tax purposes for the corporation.
While it is evident that paying yourself a Salary or Dividend both has Pros and Cons, the ultimate decision on how an entrepreneur should compensate him/herself from their corporation depends on a variety of personal and business factors. After a careful analysis of these factors with a professional accountant, the entrepreneur will have a clear answer to the age-old question of whether to pay themselves a Salary or Dividend. If you have any questions or comments on this blog post I can be reached via email at firstname.lastname@example.org or via phone at (306) 713-2477.
Jordan N. Brown, CPA, CA
President, Lift Accounting
(Disclaimer: This blog post is for informational purposes only and is not, nor can it be interpreted or relied on as professional advice.)