Salary versus Dividends:
How should you pay yourself?
We, at Associated Senior Executive, often have clients ask whether they should take their wages as a salary or dividends. As a business owner of an incorporated business, you can derive your income from either salary or dividends or from both.
What are the differences between dividend or salary income and what is best for you?
This is a simplified newsletter to inform you that there are these options but ultimately it is up to you to discuss with your professionals, your certified accountant and/or tax lawyer, which is the most meaningful and advantageous for you, your family, and your future.
SALARY
With a salary, in Canada, you are eligible to make CPP and RRSP contributions: save now for your future.
With a salary, you have a consistent and predictable income. There is a known wage making it easier to set your personal goals.
With a salary, going to the bank or other sources for loans or credit, you have this predictable income to present.
With a salary, you can plan more readily for your tax bills. You know the probable income tax and you make instalments accordingly. You have fewer surprises at tax time.
With a salary and if you have young children, you may deduct some important costs. For example, you can deduct nanny expenses, before or after school expenses, daycare costs.
DIVIDENDS
Dividends are a shareholders income paid from the corporation from after tax earnings of the corporation. Whereas salaries are an expense to the company, dividends are paid out from the earnings of the corporation from retained earnings on which taxes have been paid.
With dividends, there is no mandatory retirement contributions. In order to contribute to RRSP you must have an earned salary; dividends do not qualify.
With dividends, there is less chance for payroll penalties if required remittances are not paid on time.
With dividends, there are fewer tax remittances and instalments during the year.
With dividends, you may defer tax payments but it is up to you to make sure there is enough money to pay for those taxes as you have not paid in instalments or in deductions at source.
With dividends, there are some complex planning that can allow you to split your dividend income with members of your family. Advice, again, is most important in consideration of the changing tax laws. There are laws regarding how much dividend you are eligible to take, for you and the family members and their ages.
With dividends, you may lose the benefits of the health and dental insurance of your corporation.
To be clear, in theory your taxes owed, whether from salary or dividends, should be equal. If the income you pay yourself exceeds $500,000, there is a 2% tax savings. There is also an opportunity to recover a ‘Dividend Tax On Hand Account’ for tax paid to the corporation.
Further regarding taxes, the year-end for personal taxes on wages paid by salary is December 31st, to be fully remitted end of the next April.
Dividends, on the other hand that are paid out at by year end of January 1st of one year can be deferred on personal taxes owing until the April of the following year, a 15 month deferral.
SALARY AND DIVIDENDS
There is an option of using both salary and dividends allows for the benefits of both. Both tax and non-tax factors must be considered when selecting the type of remuneration best suited to your situation.
You can see where professional advice for your targeted and personal situation is most important when it comes to paying yourself as a business owner, whether from salary or by dividends. Seek out your professional advice and we. At ASE, are here to help.
Doreen Levitz ASE, Jan Wallace ASE