Should I pay myself salary or dividends as a business owner? Watch Video
Allan Madan, CPA, CA
Should I pay myself salary or dividends from my corporation? Read More…
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.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
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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Thanks very interesting blog!
Thank you for taking the time to read !
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!
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
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% ?
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
Test Comment
What is the difference between non-eligible dividends and eligible dividends in terms of their gross up rate?
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
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?
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
Hi Allan,
Does the increase in tax on non-eligible dividends affect eligible dividends as well? Thanks.
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
Hi Allan,
Does paying either salary or dividends have any impact on the small business deduction?
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
Hi Allan,
Does the small business deduction apply for Canadian businesses based outside of Canada?
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.
Hi Allan,
Will the dividend tax credit increase to reflect the increase tax rate on the non-eligible dividends?
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
Hi Allan,
is it possible to pay dividends to my children?
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
Would it be much more beneficial if I pay it to my wife?
Hi J.J.,
Is your wife a shareholder or an employee of your incorporated company? does she have any other source of income?
My wife is also part-owner of the company, but she does have additional sources of income from another side business.
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.
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?
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
hi Allan, is it possible to pay dividends to a trust fund?
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
Does personal liability protection protect me from actions committed by co-owners or employees of my business?
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
What are the tax implications of paying dividends to non-residents?
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
How do I know the amount of money I have in my CPP?
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
Hey, I heard the tax rate on dividends paid by small businesses has gone up. Is it true?
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
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.
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
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?
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
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
Yes, as long as the expenses that you’ve incurred personally were on behalf of the corporation for business purpose.
What type of dividends can be paid out tax free to a shareholder? ie the $40,000.00. What is the CRA tax interpretation bulletin explains and confirms this?
Hi William,
?Dividends up to $35,000 (as of 2014) are tax free in the province of Ontario. This amount will change slightly depending on the province that you live in.
There isn’t an interpretation bulletin or specific section of the Income Tax Act that says that the “First $35,000 of dividends paid are tax-free.” The tax-free result occurs because of the dividend tax credit and basic personal tax credit of $11,000.
Thanks,
Allan Madan, CPA, CA
Hi Allan,
I have watched several of your videos throughout the past few years and have found them quite informative. You’ve done some good work and I think it shows.
Thank you for your tips and the work you have put into your videos. Thanks for making these helpful.
One question.
When you compare Corporate tax rates of 15.5% to an individual tax rate of 46.4%, you are assuming that the amount payable to the individual is paid out as a non-taxable dividend, correct? (Because obviously the person still needs to file personal income taxes). On this note, excuse my profound ignorance on the subject, but how does a corporation actually “issue” dividends? I find this entirely confusing. Sorry. I am just very confused on this issue. I am looking for something to totally simplify this for me.
Note, I am currently incorporating for the sake of being paid as a contractor. I believe I will be the only director. I totally do not understand shares and dividends and find this very confusing. Can anything possibly simplify this for me so that it can be brought to a practical level of actually “doing” it and issuing shares and dividends? Do you have a “how to” on dividends and shares “for dummies”? Thanks.
Hi Danny,
Thanks for following up with me. The tax-free amount of dividends that can be received by an individual is $35,000 in the province of Ontario, providing that the individual has no other source of income in the year.
For dividends to be paid, the following steps should be taken:
1. Review articles of incorporation to verify if dividends are allowed to be paid on the capital stock of the company (certain share classes are not eligible for dividend payments)
2. Prepare director’s resolution for payment of dividends
3. Update minute book for payment of dividends
4. Record accounting entry for payment of dividends
5. Write a cheque for the amount of dividends to be paid
6. Prepare T5 slip by February 28, 2016 for dividends paid in the 2015 calendar year
Thanks,
Allan Madan, CPA, CA
Hi Allan,
Great video, very informative. It’s great to know that you’re local. I live in the GTA and I will definitely be getting in touch with you regarding my accounting for 2015!
Could you please advise me on something in the meantime?
I run a freelance video production company registered as a sole proprietorship and my wife runs her own photography company as a sole proprietor as well. We plan to apply for a mortgage in a few years and are trying to take any early steps that will help us secure a loan down the road because we’ve heard it is tougher for self employed individuals to prove their income.
We have plans to incorporate under her company name and offer the photography and video together as one company and pay ourselves salaries. In your video you say that this is an advantage because it is ‘provable income’ for financing purposes.
My question is: Does earning salaries effectively make us seem like regular employees of a company rather than ‘self-employed’ owners of a company in the eyes of a financial institution? In your experience with your clients, if they earn a salary and have payroll stubs, does this completely get them over the hurdle of the stigma associated with applying for a loan as a self employed person?
Thanks.
Hi Chris,
Thanks for your questions. Even though salaries will be paid from your wife’s company to yourself and to your wife,both of you will still be classified as ‘self employed persons.’ Having said that, it does help to have a T4 (employment income) slip along with pay-stubs to prove that you are making a regular income. More importantly, bankers will look at Line 150 (total income) of your and your wife’s Notice of Assessment from the prior year when making a lending decision. So it’s important that both of you have sufficient income reported on line 150 to qualify for a mortgage.
Hi Allan,
I really appreciate your reply. Would you mind clarifying a bit further please? If we are on the payroll of my wife’s company, why are we still considered self-employed persons? Is there a way to structure one’s own company to make them an employee rather than self-employed?
Hypothetically if we walked into a bank and applied for a mortgage and showed them our payroll slips and did not mention that we were self employed (my wife’s company does not use her name in the title), would they not consider us regular payroll employees? Would they still require to see our previous years NOA?
Finally, why do they look at Total Income and not Net Income?
Thank you very much for taking the time to help.
Hi Chris,
These are good questions. I agree with you that you are an employee of your company if you receive a T4 slip and are on your company’s payroll. However, for banking purposes, you will be classified as a self employed person. This is not a bad thing. What matter’s is your total income (line 150 of your previous year’s NOA) and current salary. The higher, the better for loan qualification purposes.
Total income is a better measure of your earning power than net income. Net income includes tax deductions like RRSP contributions, net capital losses from pervious years, etc.
Hi Allan,
I have a question about dividends and the T2 Schedule 3 Return:
I am a small business owner and possess 100% of the shares in my company. Last year I paid myself $18,218 in dividend income. The dividends were considered non-eligible dividends (i.e. they were dividends eligible to the small business tax rate). Which parts of Schedule 3 on the T2 Tax return am I responsible for filing out? Part 3 or Part 4?
If it is Part 3: How do I fill it out as I am not a connected corporation (i’m a single person) and do not have a business number (which is asked for in Line 410)? The T2 Guide is unclear on how to fill out Schedule 3 so if you could provide me with some guidance it would be much appreciated….
Thanks.
Hi Allan,
Thank you for taking my questions and providing hours of invaluable advice.
I am 63 yr young and have incorporated my Alberta company which principally earned through contract.
However, times are slow and wonder I should continue to pay myself to deplete the retained earnings or payout dividends and dissolve company
Thanks again for your advices
Richard
Hi Richard,
Pay out dividends to yourself to the extent that you need the money in order to pay for your bills. I don’t suggest that you dissolve the corporation, because by doing so you will have to liquidate all of the company’s assets and pay out any retained earnings to you as a taxable dividend.
Hi Allan,
What a great site….thanks very much for sharing all this information it’s extremely generous of you.
I am hoping that you can answer a question for me concerning the completion of the T5 documentation. I have a small incorporated company that has built up retained earnings over several years and now that I am close to retiring I a plan to dividend it out to myself over the next few years. However I am a bit confused when it comes to the question of whether the dividends that company is paying are eligible or ineligible and as a result whether I should be completing boxes 10, 11 and 12 or 24, 25 and 26. Assuming that this is fairly straight forward what would the most common practice be?
Thanks very much,
Bob
Hi Bob,
Eligible dividends are paid from a corporation’s GRIP balance. The GRIP balance represents the company’s annual taxable income in excess of $500,000 less eligible dividends paid since the inception of the company. If your company never made more than $500,000 in taxable profits in a year, then your company will not have a GRIP balance and in this case dividends paid would be classified as ‘ineligible’.
Complete boxes 10, 11 and 12 for ineligible dividends.
Dear Allan,
Thank you very much for this valuable information. We live in BC.
Do you know an accountant as knowledgeable as you are to help us with starting corporation?
Thank you,
Irina
Hi Irina,
I work with clients all across Canada, and I would be pleased to help you. Please let me know when you are available to speak with me.
Hi. Again great blog
Im trying to do some of the account work myself and doing the cra remittance for the only employee me. Seamed like a good idea. But i cant seam to figure out the taxes.
The business is incorporated. I would like to pay myself a salary of $45000 for the year starting now.
I also have been taking out some dividens at infrequent amounts.
My question is how much federal and ontario tax doni have to withhold/remittance for the $45k
I know CPP will be about $2215 x2 both employee and employer i am
The cra online calculator is saying withhold $25000 i think im doing something wrong.
Cheers Steven
Hi Steven,
Deduct the following amounts:
1. income tax of $6,938
2. CPP of $2,054.25
Remember to pay both the employer’s and employee’s share of CPP premiums to CRA. You will be EI exempt.
Hi.
Im in a good situation where my small business can aforde to pay both myself and my wife. My wife is in the process of quitting her job.
I was wondering how i would go about paying us both now?
Currently i have just been drawing a salary of 60k for myself. I would like to do the same for my wife.
Thanks . Love this blog
Hi Steve, consider paying yourself and your wife dividends in order to avoid payroll taxes. Note: Your wife has to be a shareholder and must be working at least 20 hours / week to be eligible to receive dividends according to the new rules. In addition, the dividends paid to her must be reasonable based on the work performed.
Hi,
I have recently opened up my incorporation and I do software services for other companies based on their needs. I am working as independent contractor to one of the IT company. My question is I would like to recruit a few people in India and get some software developed through them for my own company.
Can I pay them the money from my business account directly?? LIke using (Transfast.com or ICICI Money to India)??
Is it all Legal in Canada?? I live in Winnipeg, Manitoba Province.
Hi Nancy,
Yes, you can transfer payments from your Canadian corporate account to subcontractors in India. This is allowed from a tax perspective. Please make sure you keep copies of the sub-contract agreements along with invoices issued by the Indian sub-contractors, in case the CRA asks for these documents in the future.