There are 3 ways to take money out of a corporation:
1. Through a shareholder loan (must be repaid)
2. Through dividends
3. By paying yourself a salary
As a business owner/manager, you can pay yourself a salary, dividends, or do a mix of both.
Choosing to pay yourself a salary or dividends will depend on your personal and business needs.
Let’s look at the differences below, and what each option could mean for you when deciding how to structure your compensation.
Related: Do shareholder loans count as taxable income?
Should I pay myself a business salary?
If you pay yourself a salary from your corporation, it’s reported as personal income.
That means you’ll be paying the personal income tax rate on your salary, which is higher than the corporate tax rate.
However, the salary is considered a business expense for your corporation and lowers its taxable income.
If you decide to pay yourself a salary, you’ll need to register a payroll account with the Canada Revenue Agency (CRA).
Each time you pay yourself, you’ll need to withhold and remit income taxes to the CRA.
You’re also required to make mandatory payments to the Canada Pension Plan (CPP) on your income.
If you’re a small business owner and your net income is more than $3,500, you must pay double the CPP than if you were an employee.
Since your business salary is counted as personal income, you also qualify for income tax credits, which include child care and medical expenses.
Paying yourself a salary would be a good option if you rely on mandatory retirement savings.
Your RRSP deduction room is also built using your business salary.
RELATED: Click here for a comparison of TFSA vs. RRSP.
Should I pay myself dividends?
Dividends are paid to shareholders of your corporation.
Dividends are considered investment income instead of personal income.
You might pay slightly less tax on dividends than on a salary, since you pay corporate tax rates on dividends.
Since dividends aren’t considered an expense to your corporation, they won’t lower your corporation’s taxable income.
When you want to prepare dividends for your shareholders, you move the cash from your corporate account to the shareholder’s personal account.
You’ll have to prepare and file T5s to the CRA for anyone who receives dividends.
You won’t need to register for payroll and remit source deductions if you’re the sole owner of your corporation.
Paying yourself dividends could be right for you if you don’t want forced CPP contributions.
Keep in mind dividends don’t build RRSP contribution room, so you’ll want to have your own retirement plan in place.
We summarize the differences between salary and dividends in the chart below.
|Pay personal income tax rate
||Pay corporate tax rate
|Pay into CPP
|Qualify for income tax credits (childcare, medical expenses, GST credits)
||No personal income tax credits
|Builds RRSP contribution room
||Doesn’t impact RRSP contribution room
|Requires issuing a T4 for the salary
||Requires issuing a T5 for the dividends
So how should I pay myself as a business owner?
It depends on your individual business and family situation.
Dividends are a more flexible payment option and you don’t have to pay into CPP so you’ll reduce your costs that way.
However, you’ll need to be careful about contributing to your own retirement savings.
And you won’t be creating contribution room in your RRSP by issuing yourself dividends.
Also, dividends aren’t accepted as salary on loan applications if you’re applying for a mortgage or other lines of non-business credit.
Speak to a tax professional to find out which option is right for you.
Book an appointment with FBC
FBC works with Canadian farmers and small business owners to minimize their income taxes and maximize their assets.
Contact us for a no-cost, no obligation consultation so we can explain how you can make sure you’re taking advantage of all the tax-saving opportunities available to you.