Alphil J. Guilaran
Alphil J. Guilaran
March 2, 2020

As a business owner, you can pay yourself a salary, a dividend, or a combination of both. In this article and infographic, we will examine the difference between salary and dividends and review the advantages and disadvantages of each.


When deciding to pay yourself as a business owner, please consider the following factors:

  • How much do you need -What are your personal and corporate cash flow needs?
  • How much tax – What are your personal and corporate income tax rates?
  • Other considerations - Will you be making contributions or be needing retirement and employment insurance?

 

How much do you need?

Determine your cash flow on a personal and corporate level.

  • What’s your personal after-tax cash flow need?
  • What’s your corporate cash flow need?

 

How much tax?

Figure out how much you will pay in tax. Business owners understand that tax is a sizeable expense.

  • What’s your personal income tax rate?

Depending on your income and the province you reside in, you may need to include income from other sources to determine your tax rate (example: old age security, pension, rental income, investment income, etc.).
If you decide to pay out in dividends, be mindful of whether you will be paying out eligible or ineligible dividends. The taxation of eligible dividends is more favorable than ineligible dividends, from an individual income tax standpoint.

  • What’s your corporation’s income tax rate?

For taxation year 2020, the small business federal tax rate is 9%. Please remember, if you pay a salary, salary is considered a tax-deductible expense. As a result, this will lower the corporation’s taxable income, whereas, paying out dividends will not lower the corporation’s taxable income.

 

Other considerations

If you pay yourself a salary, please consider the following:

  • Do you need RRSP contribution room?

If you are a physician, consider government match programs requirements before you determine your salary.

  • Are you interested in contributing to the Canada Pension Plan?

This is unique to your circumstances; therefore, performing a cost-benefit analysis to determine the amount, if any, to be contributed to the CPP would be beneficial.

  • Do you need employment insurance (EI)?

For shareholders owning more than 40% of voting shares, EI is optional. There are, however, situations worth careful consideration, such as maternity benefit, parental benefit, sickness benefit, compassionate care benefit, family caregiver benefit for children, or family caregiver benefit for adults.


We would also advise that you get in touch with your accountant to help you determine the best strategies for your unique situation.


Source: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.html 


Source: https://www.canada.ca/en/employment-social-development/programs/ei/ei-list/reports/self-employed-special-benefits.html#h2.01-h3.02