Small business owners (SBOs) in Canada have the option to pay themselves from their business through either salary or dividends. It can be difficult to determine whether to be compensated by wages or dividends, as there are pros and cons to each. AG Tax has prepared a brief summary on these two payment methods, which may be helpful to existing as well as newly established SBOs.
Difference Between Salary and Dividends
Salary is treated as an expense to the business. The amount that an individual withdraws will be subject to personal income tax. Dividends, on the other hand are paid out from after-tax retained corporate profits, and subject to preferential tax rates.
Pros & Cons of Salary
Pros
• Creates RRSP contribution room
• Eligibility to receive insurance and benefits tied to the salary
• Greater earned income for individuals which results in greater income based deductions/credits
• The salary or bonus paid will be treated as a deduction to the corporation’s profits
Cons
• Income splitting may be limited
• Increased filing requirements as owners would need to set up a Payroll account with the Canada Revenue Agency (CRA)
Pros and Cons of Dividends
Pros
• Subject to lower tax rates and better tax credits compared to tax on salary
• Dividends are not subject to CPP
• Dividends are not subject to withholding tax
Cons
• Does not create RRSP contribution room
• As dividends are not earned income, income based deductions/credits are not available
Tax Integration Between Salaries and Dividends
Due to the ‘theory of integration’, there is very little difference between paying dividends and salary to owners themselves in terms of taxes imposed. However, tax rates should not be the only deciding factor. Business owners should also consider their short-term/long-term plans, priorities and needs. Tax integration is not perfect, and it is always advisable to consult a tax advisor to help you decide the best approach for receiving compensation from your company.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax associates are dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
