If you own a business through a corporation, one critical decision you face is how to pay yourself: salary, dividends, or a mix of both. Let us break down the key considerations to help you make an informed choice.

Understanding the Basics

1. Salary:
   • Treated as an expense for the corporation, reducing taxable income.
   • Reported as employment income on your personal tax return (via a T4).
   • Requires payroll registration, withholding deductions (CPP and income tax), and regular CRA remittances.
2. Dividends:
   • Paid from after-tax corporate income and reported as investment income on personal returns.
   • Comes with a dividend tax credit to avoid double taxation.
   • Simpler to administer as no payroll accounts or deductions are required, however may result in quarterly personal tax installments.

 

Advantages of Salary

• Builds Retirement Contribution Room: Salaries generate RRSP room, which is essential for building your retirement savings.
• Easier Loan Approvals: Consistent income records, such as T4 slips, make it easier to qualify for mortgages or other financing.
• Immediate Tax Relief: Reduces corporate taxable income, providing tax savings to the corporation in the current fiscal year.
• Supports Long-Term Financial Planning:

 

A history of T4 income opens the door to establishing an Individual Pension Plan (IPP), valuable tool for strategic wealth and retirement planning.

• • IPP Benefits:
    • Higher contribution limits compared to RRSPs, especially for business owners over 40.
    • Corporate-funded contributions that are tax-deductible for the business.
    • Enhanced tax efficiency and retirement security when integrated into a broader wealth strategy.

 

By creating a history of salary payments, you not only ensure consistent personal income but also lay the groundwork for sophisticated financial tools like IPPs and improved access to credit.

Advantages of Dividends

• No CPP or EI Contributions: Dividends avoid mandatory payroll deductions, freeing up cash flow for other business needs.
• Simplified Administration: No need to manage payroll accounts or source deductions—declare and transfer dividends as needed.
• Income Splitting: Dividends can facilitate income splitting, though professional advice is crucial to navigate Canadian TOSI rules.

 

Key Considerations

• Cash Flow and Simplicity: If managing payroll and remittances feels burdensome, dividends might be simpler.
• Future Financial Goals: Planning for significant purchases, like a home? Salaries provide consistent income records.
• Retirement and Wealth Planning: A blend of salaries and dividends can optimize retirement savings, tax planning, and business legacy goals.

 

No One-Size-Fits-All Solution

Every situation is unique, and the ideal approach depends on your business structure, personal goals, and financial outlook. A customized tax plan with the help of a professional advisor can ensure you’re maximizing your financial opportunities.

If you have further questions or want personalized advice, feel free to reach out to us.