Salary vs. Dividends

Should you pay yourself a salary or dividends?

 

The decision of whether to pay yourself a salary or dividends as a business owner is an important one, as it can have tax implications. If you pay yourself a salary, the payments are both a corporate expense and personal employment income for you, complete with a T4 slip. This income is then taxable.

 

Paying yourself dividends, on the other hand, means that you are taking money out of the corporation which is not subject to payroll taxes. The downside is that dividends are taxable as personal income, so you may end up paying more tax overall.

 

The decision of whether to salary or dividends ultimately comes down to a few factors: your business structure, how much money you want to take out of the business, and your personal tax situation. You should speak to an accountant to get advice tailored to your specific circumstances.

 

Why pay a salary?

 

There are a few reasons why you might choose to pay yourself a salary:

 

1. It’s a predictable income stream: If you rely on dividends for your personal income, the amount you take home can fluctuate significantly from year to year depending on the profitability of your business. A salary gives you a predictable income stream that you can count on.

 

2. It allows you to contribute to the Canada Pension Plan: If you are a sole proprietor or partner in a business, you are not able to make contributions to the Canada Pension Plan (CPP). This can be a significant disadvantage if you have not yet reached retirement age and are relying on the CPP for income in retirement.

 

3. It may be tax-deductible: If you pay yourself a salary, the payments are considered a business expense and can be deducted from your company’s income for tax purposes.

 

4. You may be able to access government benefits: If you are paid a salary, you will have employment income which can make you eligible for certain government benefits, such as employment insurance.

 

Why pay dividends?

 

There are a few reasons why you might choose to pay yourself dividends:

 

1. Dividends are not subject to payroll taxes: When you pay yourself a salary, the payments are both a corporate expense and personal employment income. This means that you have to pay payroll taxes on the salary, which can be a significant cost for your business.

 

2. You can take advantage of the dividend tax credit: When you receive dividends, you are eligible for the dividend tax credit. This credit can help to offset the taxes you pay on your dividends, and may result in a lower overall tax bill.

 

3. Dividends can be paid to multiple shareholders: If your business has multiple shareholders, you can choose to pay dividends to them instead of salaries. This can be advantageous if you want to distribute the company’s profits among the shareholders in a tax-efficient way.

 

4. You can time your dividend payments: If you are looking to minimize your personal tax bill, you may want to consider timing your dividend payments. For example, you could wait to receive dividends until after you have retired, when your personal tax rate is likely to be lower.

 

Making the decision

 

The decision of whether to pay yourself a salary or dividends is a complex one, and there is no right or wrong answer. You should speak to a professional at BBS Accounting CPA to help you decide whether you should pay yourself a salary or dividend.