If you are running a small business as a corporation in Canada, you may have a few different choices as to how to pay yourself. You can either receive payment in dividends or pay yourself as a business salary. You can also have a mix of both in order to reduce your taxes. There are advantages and disadvantages associated with both salary and dividends. As a Canadian business owner, you must learn what strategies you can use to optimize your income.
If you choose to pay yourself as a business salary, one of the benefits is that you have a personal income which means you will pay into the Canada Pension Plan (CPP). What you receive in retirement from CPP depends on how much and how long you contribute.
To pay yourself a salary, your corporation will have to register a payroll account with CRA. Each time you get a salary, CPP and taxes will be deducted from your pay. These deductions are remitted to the CRA on a regular basis. The business salary or bonus will be a tax deduction for your business. You can also consider income splitting by paying salary to a spouse or children in order to pay less taxes, providing they are also involved in your business. You can also take advantage of other investment opportunities for retirement by contributing to a TFSA and RRSP.
When someone seeks approval for a loan, financial institutions like to see predictable, steady income. Earning income through a regular salary will make your case strong whenever you apply for a mortgage or loan.
When it comes to disadvantages of receiving a business salary, it is important to consider that salary pay is taxable, while some dividends may be less taxable or tax free, depending on your tax bracket. If your business profit fluctuates from year to year, paying yourself a salary can be disadvantageous because you wouldn’t be able to carry back a business loss in the future.
If you select dividends to pay yourself, the good news is that dividends are taxed at a lower rate. While you pay less in personal tax, dividends can be declared at any time which enables you to improve your tax situation. On top of that, you are not required to pay into CPP. As compared to receiving income as salary, paying yourself with dividends is less complicated.
So far as the disadvantages of receiving income through dividends are concerned, you can’t contribute to an RRSP. Receiving dividends also eliminates the chances of possible personal income tax deductions such as child care expense deduction.
Whether you should choose dividends or salary to pay yourself from your business depends largely on your personal financial situation: your income level, cash flow needs, your age, corporation’s projected income for a given year, etc. It is highly recommended to consult a financial planner who can help you make the right decision.
About Kewcorp Financial
Kewcorp Financial in one of the most reputable financial planning companies in Canada. We help business owners reduce their tax liabilities and increase their income. If you are in Edmonton and need professional advice, feel free to contact us!