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  • Accounting, Small Business Accounting, Tax Planning

Should I Pay Myself a Salary or Dividends?

One of the common questions we hear from our business owner clients is how they should structure their business to maximize their profits and minimize their tax obligation. If you own a business through a corporation, you have the choice to pay yourself a salary or dividends (or a combination of both).  

 

Salary vs. Dividends – What’s the Difference Anyway?

A salary is the more typical pay structure that you are likely aware of in a regular employer-employee relationship. In this case, if you pay yourself a salary, the payment become an expense of the corporation, and then at tax time, you would issue yourself a T4 and your salary is considered employment income. The salary expense reduces the corporation’s taxable income (which therefore reduces how much tax the corporation must pay).

Dividends are payments to shareholders of a corporation that are paid from the after tax earnings of the company. While they therefore do not reduce the corporation’s taxable income, they would result in less personal tax liability than a salary due to the dividend tax credit.

 

Benefits of Salary

  • Reduces corporate income tax obligations
  • Builds RRSP Contribution Room
  • Allows you to contribute to the Canada Pension Plan
  • Helps you qualify for a mortgage or other loans where lenders like to see predictable income

 

Benefits of Dividends

  • May reduce personal income tax obligations
  • More cash now as you do not need to contribute to Canada Pension Plan, Employment Insurance, etc.
  • Simple to administer for solely-owned corporations – no need to register for payroll and remit source deductions

 

 

Essentially in summary:

  • Salaries reduce corporate taxes but create higher personal taxes than dividends.
  • Dividends do not reduce corporate taxes, but create less personal taxes than salaries

 

So which structure is right for you?

There is no clear cut answer to this question (if only!) In order to help you figure out what you should do, you (or your accountant) should calculate the total taxes, both corporate and personal, that would be paid under both scenarios.  You should consider whether there are any benefits for you to pay into systems like CPP or EI, or if there are any other tax credits that you may be able to take advantage of depending on how you pay yourself. Your situation might also change over time, so be sure to keep your accountant apprised as to any of these key details that may impact the answer to this calculation.