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.
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.
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.
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.
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 – Accountant Mississauga
Allan Madan is a Chartered Accountant and a Tax Expert in the Toronto, Mississauga and Oakville regions of Ontario, Canada.
If you found this article useful, Allan Madan encourages you to visit his website Accountant Mississauga, Toronto and Oakville for additional tax tips and more information on this topic. You can also call Allan Madan at 905-268-0150.
Also, get access to Allan Madan’s Free Report, “20 Tax Secrets on How to Beat the Tax Man,” 20 Tax Secrets on How to Beat the Tax Man