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Should I pay myself salary or dividends as a business owner?

Should I pay myself salary or dividends from my corporation?

This is a very common question that I encounter in my accounting practice in Mississauga, and the answer can make a big difference in your bottom line.

Advantages of Salary – Should I pay myself salary or dividends from my corporation – Accountant Mississauga

Should I pay myself salary or dividends from my corporation? To answer this question, you should look at the advantages and disadvantages of each.

The advantages of paying yourself a salary from your corporation are:

  •   Salary is treated as earned income for RRSP purposes. This means that salary

    increases your RRSP room.

  •   Salary is ‘provable income’ for financing purposes. If you are planning on applying for a line of credit or a mortgage, then paying yourself a salary will help you qualify.
  •   Salary is subject to Canada Pension Plan (CPP) premiums. By paying into the Canada Pension Plan your entitlement to CPP will increase.
  • Any salary or bonus that is paid out will be taxed deductible for the corporation
  • If your spouse or children are employees, you can use salary for income-splitting strategies

Disadvantages of Salary

The disadvantages of paying yourself salary from your corporation are:

  •   Paying salary is administratively cumbersome. You may have to hire an accountant in Mississauga to manage payroll remittances to the Canada Revenue Agency, preparation of T4 slips, calculation of source deductions, etc.
  •   Salary is subject to CPP premiums at a rate of 9.9 cents for every $1 of salary. This can be expensive.
  • Salary will be considered as personal income and will be subject to personal income tax rates based on your total taxable income.

Advantages of Dividends – Should I pay myself salary or dividends from my corporation – Accountant Mississauga

The advantages of paying yourself a dividend from your corporation are:

  •   Dividends are taxed at a lower rate than salary. In fact, the first $40,000 of dividends can be received completely tax-free.
  •   Dividends are not subject to CPP premiums, which can add up to big savings.
  •   Dividends are administratively simple. You do not have the burden that you do with payroll. To pay yourself a dividend, you simply write a cheque to yourself from your corporation, record it in your corporate minute book and file a T5 return.

The disadvantages of dividends

  • While not paying CPP Premiums may be seen as big savings in the short-term, this is not necessarily the case in the long-term.  Although this may depend on the individual, contributing to CPP premiums now will only add to your CPP benefits when you are eligible to claim it.
  • If you have children and are paid only through dividends, you will not be eligible to claim childcare costs because you do not have any earned income.

In order to pay dividends, your articles of incorporation must allow for dividends to be paid. I recommend having your articles of incorporation reviewed by a business lawyer or Accountant in Mississauga.

Additionally, at the end of each year, a business lawyer should update your corporation’s minute books and prepare a director’s resolution for the dividends paid.

Note: To understand exactly how dividends are taxed, please see why dividends are grossed up for tax purpose

Update December 2013

The 2013 Canadian Federal Budget has made changes to the dividend tax rules taking

Salary versus dividends and Canadian 2013 federal budget making changes to dividend tax rate

effect January 1, 2014.  The changes will increase the dividend tax rate on non-eligible dividends (i.e. dividends from small corporations from 19.58% to 21.22%.

Prior to 2014, dividends were more financially beneficial than salary due to the low tax rate on dividends.  However, the increase in tax on non-eligible dividends has wiped-out the absolute advantage that dividends once held over simply collecting salary.

For more information on the Canadian 2013 budget regarding dividends and taxation changes, please consult the Government of Canada website.

Conclusion – Salary vs. Dividends

Now that you know the advantages and disadvantages of dividends and salary, you should consult with an accountant in Mississauga to determine which one best fits your circumstances.





About the Author – Allan Madan

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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Should I pay myself salary or dividends as a business owner? was last modified: September 16th, 2014 by superAmin
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About the author

is a Chartered Accountant, CPA and Tax Expert and enjoys working with business owners, individuals and entrepreneurs.

Disclaimer

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.

46 Responses to Should I pay myself salary or dividends as a business owner?

  1. Pingback: Should I pay myself salary or dividends from my corporation? | i publish news - New York

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    • superAmin says:

      Hi Myra,

      Thank you !

      You are more than welcome to do so. Please be advised that you are not legally allowed to sell, publish, or reproduce this information.

      Thanks !

      The Team at Madan CA

  3. Thanks very interesting blog!

  4. Kanwal says:

    When you say first $40,000 of dividends can be received tax free, do you mean federal tax free or provincial tax free or both? Plz do reply. It’s confusing!

    • superAmin says:

      Hi Kanwal,

      The first $40,000 in dividend results in $0 in federal tax. It also results in $0 in provincial tax (In Ontario). However, in Ontario, there is something called Ontario Health Premium which is levied on individuals with certain income. On $40,000 of income, Ontario charges $450.

      Therefore, to answer your question, it results in $0 in federal tax and $450 in quasi-provincial tax in Ontario at least.

      - Allan and his team

  5. Ravil says:

    Hi Allan,
    I tried to enter dividends in the UFILE.ca ( the web site which I use to file my tax return), it does calculate tax from eligible dividends with 16.78% rate (my province is Alberta). I enter it in the T5 form.
    So how-come can it go to 0% ?

    • superAmin says:

      Hi Ravil,

      Thank you for your question and patience. Regarding your question, if you input the information from your T5 slip into the appropriate boxes on the T5 form (UFILE), the software should automatically calculate your correct tax amount. If you would like more details, please explain your situation further in order for us to get a better understanding.

      Regards,
      Allan and his team

  6. superAmin says:

    Test Comment

  7. Will says:

    What is the difference between non-eligible dividends and eligible dividends in terms of their gross up rate?

    • superAmin says:

      Hi Will,

      The main difference is the ‘grossed up’ and ‘tax credit’ rate between the two. eligible dividends are grossed up, or increased, by 138 percent with a tax credit of 15% and ineligible dividends are grossed up by 125 with a tax credit of 13.33 percent.

      Best Regards,
      Allan Madan and Team

  8. Kyle says:

    Just to clarify does the first $40,000 in dividends are tax free applicable to more then one individual? Say if I pay $40,000 to two individuals would they both be tax free?

    • superAmin says:

      Hi Kyle,

      just the initial $40,000 on dividends is tax free regardless of how many individuals is it is paid out to.

      Best Regards,

      Allan Madan and Team

  9. monkeyballzjr says:

    Hi Allan,

    Does the increase in tax on non-eligible dividends affect eligible dividends as well? Thanks.

    • superAmin says:

      Hi Huy,

      Eligible dividends tax rates remain the same, Eligible dividends (generally those received from large corporations) are grossed-up by 38% and a federal dividend tax credit is calculated as 6/11 of the gross-up (or 15.0198% of the grossed-up dividends). Hope that helps.

      Best Regards,

      Allan Madan and Team

  10. Charles says:

    Hi Allan,

    Does paying either salary or dividends have any impact on the small business deduction?

    • superAmin says:

      Hi Charles,

      The short answer is no since the small business deduction is a taxation that occurs before any salary or dividend is paid out. When a company earns income that is subject to the small business deduction, the eventual dividends will be taxed as “ineligible dividends”. An individual pays a higher tax rate on an ineligible dividend than an eligible dividend.

      Best Regards,

      Allan Madan and Team

      • Chrissy says:

        Hi Allan,

        Does the small business deduction apply for Canadian businesses based outside of Canada?

        • superAmin says:

          Hi Chrissy,

          Businesses based outside of Canada are not classified as Canadian Controlled Private Corporations. Thus they are not eligible to receive the small business deduction.

  11. Thompson says:

    Hi Allan,

    Will the dividend tax credit increase to reflect the increase tax rate on the non-eligible dividends?

    • superAmin says:

      Hi Thompson,

      Yes this change will be reflected for the dividend tax credit for dividends paid after 2013. the gross-up factor for other than eligible dividends will change from 25% to 18% and the corresponding dividend tax credit from 2/3 of the gross-up amount to 13/18 (or 11.0169% of the grossed-up dividends). Hope that helps.

      Best Regards,

      Allan Madan and Team

  12. Cruz says:

    Hi Allan,

    is it possible to pay dividends to my children?

    • superAmin says:

      Hi Cruz,

      This is not a financially viable option since your children will be hit with the so called ‘kiddie tax’. This means that any of your children under the age of 18 who receive income via an income splitting method will be taxed at the highest marginal rate.

      Best Regards,

      Allan Madan and Team

      • J.J. says:

        Would it be much more beneficial if I pay it to my wife?

        • superAmin says:

          Hi J.J.,

          Is your wife a shareholder or an employee of your incorporated company? does she have any other source of income?

          • J.J. says:

            My wife is also part-owner of the company, but she does have additional sources of income from another side business.

          • superAmin says:

            If she is part owner, she is of course eligible to receive dividends. The type and class of shares that she was issued and your share structure may also impact whether or not she has to be issued dividends as well.

  13. Arielle says:

    Hi Allan,

    What if the CRA deems my business as carrying on business and I highly dispute this? would I be able to dispute this and what kind of compliance tools does the CRA have in this matter?

    • superAmin says:

      Hi Arielle,

      Yes you should contact the CRA regarding this matter. There are always legal options to combat this as well. I know there have been some carrying on business cases that have been overseen by the Supreme Court of Canada.

      Best Regards,

      Allan Madan and Team

  14. Mahmoud says:

    hi Allan, is it possible to pay dividends to a trust fund?

    • superAmin says:

      Hi Mahmoud,

      Yes it is possible but you have to structure your business so that the trust owns some of the common shares of the business. Only then can you pay dividends towards the trust.

      Best Regards,

      Allan Madan and Team

  15. Mahmoud says:

    Does personal liability protection protect me from actions committed by co-owners or employees of my business?

    • superAmin says:

      Hi Mahmoud,

      Personal liability protection will protect you from any wrongdoing committed by co-owners or employees of your LLC. If the LLC is found liable for the negligence or wrongdoing of its owner or employee, the LLC’s money or property can be taken by creditors to satisfy a judgment against the LLC. But the LLC owners would not be personally liable for that debt. The owner or employee who committed the act might also be personally liable for his or her actions but a co-owner of the LLC who was not involved in the act or wrongdoing would not be.

      Best Regards,

      Allan Madan and Team

  16. Timothy says:

    What are the tax implications of paying dividends to non-residents?

    • superAmin says:

      Hi Timothy,

      For dividends made to non-residents, there is a Part XIII withholding tax equal to 25%. This number can be reduced if Canada has a tax treaty with the country specific to the individual who received the dividend.

      Best Regards,

      Allan Madan and Team

  17. Jasmine says:

    How do I know the amount of money I have in my CPP?

    • superAmin says:

      Jasmine,

      Thank you for your question. The amount available to you is dependent on your income and how much is being put into your CPP. You can find this information often on your pay stub. The return amount of your CPP is based on the age at which you decide to withdraw. The younger you withdraw the less you receive. The return at the age of 60 will be 36% less than at 65, and at 70 your return will be 42% more than at 65. Hope we were able to answer your question with regards to your CPP.

      Thank you,
      Allan Madan Team

  18. Jake I says:

    Hey, I heard the tax rate on dividends paid by small businesses has gone up. Is it true?

    • amadan says:

      Hello Jake,

      Thank you for your question. You heard correctly, the tax rate on dividends did go up. For dividends paid after 2013, the budget proposes to adjust the gross-up factor for other than eligible dividends from 25% to 18% and the corresponding dividend tax credit from 2/3 of the gross-up amount to 13/18 (or 11.0169% of the grossed-up dividends).
      The payer of the dividends you receive will apply the appropriate factors when preparing your income slips for dividends paid after 2013, such as the T5, Statement of Investment Income. Before the increase in 2014, the first $40,000 were tax free however starting this year that same dividend of $40,000, would result in a tax liability of approximately 3.5% due.

      Thank you,

      Madanca Team

  19. Jens Keller says:

    Hi Allan,
    I own my own business, and am paying myself a dividend. Therefore, I have not be able to put money away for CPP. I’ve spoken to my accountant, and he sad we’d have to move to salary to contribute to CPP. This would mean a higher tax rate. Do you think it is worth it to have a CPP, or is my money better spent on other investments? I have not maxed out my CPP.

    • superAmin says:

      Hello Jens.

      I would recommend you do a mixture of contributing to CPP and investing. There are lower taxes with a corporate dividend, but the potential market risk is higher. The taxes may be higher on salary, but at least you can contribute to CPP. This way, you have the CPP as backup in case your personal investments do badly and you can still experience a fair amount of growth.

      In the end, it really comes down to your tolerance for risk. If you have the discipline to maintain your retirement portfolio, you may choose to not contribute to your CPP through salary. However, consider that there are always unknowns. What happens if your business doesn’t do that well for a number of years, and you are unable to contribute to your portfolio? With a decent amount of planning, you can prepare yourself for almost anything.

      Since you haven’t maxed out your CPP yet, it would be good to take some salary and contribute. Obviously you don’t want to take out too much (you want to avoid things like the Employer Health Tax); just enough to match the lifestyle you expect to live. If you have any further questions, please don’t hesitate to ask.

      Regards,
      Allan Madan and Team

  20. Alicia Lloyd says:

    Hello,

    My spouse and I are the directors of a Corporation. Since getting back to work last February, I have decided to pay my kid some dividends in order to help her with college. She is a full-time student in College, and own Class D non-voting shares. My spouse owns a Class B and I own a Class A share, which are both voting. All the shares come from a general rate income pool (GRIP).

    Therefore, I believe that by making a declaration signed by both of the directors of the company (my spouse and I), we can direct said dividends to only the Class D shares that my child owns. Would she be subject to personal taxes?

    • superAmin says:

      Hello,

      You can pay the kids dividends as long as they are over 18 and your shares are set up correctly. The tax will depend on how much you pay them and where you are. Dividends do not reduce profit of the corporation, so the corporate tax owing does not go down if you pay dividends. If they have little to no income, your kids won’t pay taxes on the amounts given. However, they may lose their tuition credits (which could otherwise be transferred to a parent, or carried forward).

      The CRA requires your kids to apply the tuition and education credit before the credit for dividends. You can, however, plan around this by adjusting how much you intend to give them. Let’s say you gave one of your children a dividend of $12,500 with $2,000 of other income. Personal credits would take care of around $11k, so you would lose the $6,000 of tuition credits that would otherwise be worth around 20% Therefore, the lost benefit would be $1200. You might also want to set up a bursary program in your company. It would be a direct-write off to your company, and tax-free income to your kid (as long as she is in school full-time).

      Regards,
      Allan Madan and Team

  21. gary says:

    If I choose to go with the dividends only approach, can I still get my expenses reimbursed from my corporation?
    e.g. If I’m driving or travelling by rail e.t.c

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