Small business owners are often faced with the crucial question of how they should get paid by their corporations.
Two common ways small business owners get paid from their corporations is either through a Salary or a dividend – or sometimes a mix of both.
Paying yourself Salary from your Corporation
When you pay yourself a salary from your corporation, salary payment is a tax-deductible expense for the corporation whereas it is included as an employment income on your personal taxes. Here are the effects of a salary payment from the corporation:
- Salary is a tax-deductible expense for the corporation. Your corporation can deduct this expense to reach its taxable income.
- Salary is an employment income on the personal tax returns of the recipient and taxed accordingly.
- Businesses must make deductions from the salary payments – federal income tax and CPP – and contribute employer’s share of CPP. These deductions and contributions together are remitted to Canada Revenue Agency on a periodic basis. There are penalties for not making these deductions or delays in timely remittance of the same.
- Business must issue a T4 Slip to you and file an information return with CRA at year-end.
- Salary contributes towards the RRSP limit and Canada Pension Plan both of which help in retirement planning.
Paying yourself a dividend from your corporation
Dividends are paid from the earnings of the corporation and usually have the below effects:
- Dividends are paid from the after-tax income of the corporation and are not eligible for any deductions at the corporation level.
- The corporation must comply with jurisdiction law where it operates regarding dividend issuance.
- At year-end, the corporation files T5 with the Canada Revenue agency and it must determine amounts related to the type of dividend, the taxable amount of dividends and dividend tax credit. Read here: how to issue dividends in Canada.
- Dividends do not contribute towards the RRSP limit and no CPP contributions and deductions are made towards this.
- If you pay yourself only through dividends, it’s hard for you to get personal credits (e.g. mortgage) due to the non-existence of employment income.
Dividend and Salary mix – Tax Considerations
Which approach gives favourable tax consequences, depends on both your corporations and personal tax situation. You should create your own optimum mix of salary and dividend keeping in mind the effects of both on your personal tax situation.
In Canada, CCPCs (Canadian Controlled Private Corporations) have a small business limit of $500,000 so you might want to consider paying yourself a salary to utilize this limit in the best way since salary payment is a tax-deductible expense.
The above post is for information purposes and written by a CPA who strongly advises seeking independent tax advice from a corporate tax accountant or professional tax services provider, hence, do not assume any liability as a result of reliance on this post.
Maroof HS CPA Professional Corporation is an Ontario-based professional accounting firm that provides tax planning for both corporations and individuals along with a wide range of tax, accounting, and other business advisory services.
Dividend Gross up & Tax Credit Rates Canada - 2021
| Non-Eligible Dividends | Eligible Dividends | |
|---|---|---|
| Dividend gross up rate | 15% | 38% |
| Dividend Tax Credit - Federal (as % of grossed-up taxable dividend) | 9.0301% | 15.0198% |
| Dividend Tax Credit - Federal (as% of actual dividend) | 10.3846% | 20.73% |
| Dividend Tax Credit - Ontario (as % of grossed-up taxable dividend) | 2.9863% | 10.0% |
| Dividend Tax Credit - Ontario (as % of actual dividend) | 3.434% | 13.8% |
| Dividend Tax Credit - Alberta (as % of grossed-up taxable dividend) | 2.18% | 8.12% |
| Dividend Tax Credit - Alberta (as % of actual dividend) | 2.507% | 11.20% |
| The actual amount of Dividends before any regular income taxes are payable - Federal (Caution: AMT is applicable on Eligible dividends) | $30,172 | $63,040 (AMT applies) |
| The actual amount of Dividends before any regular income taxes are payable - Ontario (Caution: AMT is applicable on Eligible dividends) | $33,733 | $95,807 (AMT applies) |
| The actual amount of Dividends before any regular income taxes are payable - Alberta (Caution: AMT is applicable on Eligible dividends) | $21,541 | $74,667 (AMT applies) |
