Dividends Vs Salary

 

 

 

Salary Vs Dividend:

Most of my clients who set up a corporation have asked me how to take out money either by dividend or salary. Dividend and salary, both have their advantage and disadvantages.

 

Salary Advantages and Disadvantages:

-          Possible to contribute to RRSP

-          Require to contribute to CPP/QPP

-          Salary or Bonus expenses are deductible for Corporation

-          Income splitting is available by paying salary to related employees such as wife or children

Dividend Advantages and Disadvantages:

-          Dividends are taxed at a lower rate than salary which may result in paying less personal tax

-          No required to contribute to CPP/QPP, therefore saving money
 

o   Downside of only receiving dividend is  even if corporation owner  would like to contribute to CPP/QPP it is not possible

o   Receiving only dividend omit possibility to contribute to RRSP to reduce income or defer taxes

o   Receiving only divided can destroy possibility of other personal deduction such as child care expenses
 

-        Paying divided is simpler compare to paying salary as do not require calculating or remitting Deduction at sources.

The best solution depends on individual need of each of the business owners. Often time corporations pay out salary and bonuses to ensure that its Net Income do not exceed small business dedication limit ($500K for 2013-2014 tax year). In summary, salary or divided depends on business owners personal financial circumstances, such as income level, cash flow needs, corporate income, personal income tax deduction, net personal assets, net personal other income etc.

Pauls & Associates