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Salary Vs Dividends

Salary or Dividends?  

The question which almost every small business owner who wants to save taxes ask. If you are a small business owner and you want to save takes, you need to understand the difference between dividends and salaries.

Deciding on the right compensation strategy between salary and dividends can be quite complex. There are pros and cons with each tactic and this also could be different depending on each individual’s situation.

I always advise in order to save a lot of taxes the best strategy encompasses a combination of both salaries and dividends custom-made and personalized to the individual’s particular situation.

Even more – there is no strategy or tax plan that is carved in stone – because our life style and situation change from time to time

If you are (same as plenty of other small business owners) are uncertain about the best strategy for you on whether you pay yourself a salary or a dividend? Feel Free to contact us at 416.454.8812 or email me at mina.hanna@accountingontrack.com

Salaries / Bonuses:

Advantages:

  1. Paying yourself a salary will increase your RRSP contribution limit.
  2. Salaries are subject to CPP (Canada pension plan). Paying your CPP now will increase your CPP benefits when you retire.
  3. The salaries paid to you is an expense to your corporation and is tax deductible
  4. Certain expenses such as automobile expenses incurred for work are only deductible against employment income.
  5. Child care costs incurred are deductible against your employment income.
  6. More beneficial / easier when trying to obtain and loan or a mortgage from a bank.

Disadvantages:

  1. Payroll processing and CRA remittances on monthly basis. You will either have to hire an accountant to help or you have to do it yourself. If you have any questions about Payroll or you need someone to help you with your Payroll in Mississauga, Oakville and most of the GTA Feel Free to contact us at 416.454.8812 or email me at mina.hanna@accountingontrack.com
  1. The CPP Cost – This will be the employee portion and the employer portion too.
    Employee/employer maximum contribution (4.95%) $2,544.30 x 2 = $ 5088.60

Dividends:

Advantages:

  1. The first $35,000 – $40,000 of dividends received results in a very small amount of income tax payable by you. As long as the tax payer does not have any other source f incomeDisadvantages:
  1. Dividends received do not increase your RRSP limit.
  2. Child care costs incurred are not deductible against dividend income because dividends are not considered earned income.
  3. Banks and financial institutions prefer to see a T4 slip with a stable salary as opposed to a T5 Slip with dividend. 

    Therefore, with all the dynamic advantages and disadvantages to both salaries and dividends. The best strategy involves looking at your unique individual situation and tailoring a customized tax plan which involves a combination of salary and dividends.

    As of 2014, there has been an increase in the personal tax rate on non-eligible dividends received, resulting in narrowing the gap to almost perfect incorporation between salaries and dividends. 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 – however it really depends on each particular.

    If you need an accountant in Oakville or an accountant in Mississauga to help you save taxes and tailor a customized tax plan for your individual situation. Please call us at 416.454.8812 or email me at mina.hanna@accountingontrack.com

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