Small business owners are often faced with a crucial question of how they should get paid from 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 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 to its taxable income.
- Salary is an employment income on the personal tax returns of the recipient and taxed accordingly.
- Business 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 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 information return with CRA at year end.
- Salary contributes towards RRSP limit and Canada Pension Plan both of which help in retirement planning.
Paying yourself dividend from your corporation
Dividends are paid from the earnings of the corporation and usually have below effects:
- Dividends are paid from after-tax income of corporation and are not eligible for any deductions at corporation level.
- Corporation must comply with jurisdiction law where it operates regarding the dividend issuance.
- At year end, corporation files T5 with Canada Revenue agency and it must determine amounts related to type of dividend, taxable amount of dividends and dividend tax credit. Read here: how to issue dividend in Canada.
- Dividends do not contribute towards RRSP limit and no CPP contributions and deductions are made towards this.
- If you pay yourself only through dividends, its hard for you to get personal credits (e.g. mortgage) due to non-existence of employment income.
Dividend and Salary mix – Tax Considerations
Which approach gives favorable tax consequences, it depends on both your corporations and personal tax situation. You should create your own optimum mix of salary and dividend keeping in mind effects of both on your personal tax situation.
In Canada, CCPCs (Canadian Controlled Private Corporation) have 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 purpose and written by a CPA who strongly advises to seek an 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 which provides tax planning for both corporations and individuals along with a wide range of tax, accounting, and other business advisory services.