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Written by: Tara Hauck, CPA, CA
As a business owner, you may find yourself asking the question, “Now that my business has all this income, how do I get my money out?”
There are a number of ways to do this, but the main two strategies are to:
- Paying yourself a salary
- Or paying as a dividend
In Canada, our tax integration is nearly perfect, meaning there is very little overall tax difference between salary and dividends; however, there are still many other factors to consider.
Here are some things to contemplate when determining which strategy is best for you.
- Deductible by the company to the extent that it is reasonable.
- Qualifies as earned income for purposes of Registered Retirement Savings Plan (“RRSP”) contribution room.
- Requires contributions to the Canada Pension Plan (“CPP”) but increases amount available upon retirement as well as access to disability benefits from CPP should they be required.
- Requires source deductions to be withheld and remitted.
- Provides access to the non-refundable employment tax credit as well as other possible credits or deductions (i.e. child care expenses).
- Can be more favorably viewed by lenders where mortgage or other financing is required.
- Avoids payment of CPP contributions but lessens amount available upon retirement.
- Provides ability to split income with family members that are also shareholders.
- Is not subject to any reasonability restrictions on amounts that can be paid.
- Allows for the deferral of personal tax where funds are not required for living expenses.
- Reduced administrative costs of maintaining a payroll account and issuing T4 slips.
- Higher “taxable” amount of dividend used to determine income for certain thresholds, such as the old age security clawback.
As you can see, even a simple question can turn into a complicated analysis (which is really only fun for accountants).
Tara Hauck, CPA, CA is a Tax Manager and member of Manning Elliott's tax team. She advises our individual and corporate clients on a wide range of tax planning and tax compliance matters. To contact Tara, feel free to call her at 604-714-3674 or email her at email@example.com
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.