Deciding on the right compensation strategy between salary and dividends can be quite tricky. There are advantages and disadvantages with each approach and this also varies depending on one’s situation. So the best strategy in order to save money involves a combination of both tailored to the individual’s situation.
Are you, like thousands of others small business owners unsure about the best compensation strategy in terms of paying yourself a salary or a dividend? This money saving strategy about salary versus dividends aims to help.
My name is Allan Madan, your trusted accountant, and here I will discuss, both, the disadvantages and advantages of salary and dividends, so you learn how to maximize your savings.
First,let’s talk about the main advantages of paying yourself a salary:
- Paying yourself a salary will increase your RRSP contribution room. The more salary you will pay yourself, the bigger the contribution room will be for future years.
- Since salary is subject to Canada pension plan premiums, contributing now to the CPP will greatly increase your CPP benefits when you retire.
- The salary or bonus paid to you is tax deductable for your corporation.
- Certain employment expenses like car costs incurred for work are only deductable against salary.
- Paying yourself a salary is an administrative burden. You have to hire an accountant to help you with monthly payroll remittances, or you have to do it yourself.
- If a salary is paid to a family member for income splitting purposes, that salary is going to be heavily scrutinised. The Canada Revenue Agency will demand to see time sheets, employment contract, and verifiable evidence that the rate of pay per hour is reasonable.
A dividend paid to a family member who is also a shareholder of your corporation is not subject to such intense CRA scrutiny as a salary would be.The benefit dividends once had was that they had an absolute tax rate advantage over salary. As of 2014, there has been an increase in the personal tax rate on non eligible dividends received, resulting in an almost perfect integration, at least in Ontario.
This means whether you pay yourself dividends or salary the total income tax cost will be practically the same. While the income tax benefit is almost gone there are still some advantages of paying yourself a dividend.
- The first $40,000 of dividends received results in a very small amount of income tax payable by you.
- Dividends received do not increase your RRSP room.
- Child care costs incurred are not deductable against dividend income because dividends are not considered earned income.
- Some financial institutions prefer to see a stable salary as opposed to a sporadic dividend, if you want to obtain a loan.
Overall you can see that there are pros and cons to both salaries and dividends. The best money savingplan involves looking at your specific situation and tailoring a combination of salary and dividends to meet your needs.
Thank you for readingthis article about salary versus dividends, and I hope you found it useful. Please comment because it helps me come up with more relevant content. Also, get access to a free report, ’20 Secrets on How to Beat the Tax man’ when you visit my website.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.