Salary vs. Dividends
Owner’s of an incorporated company have two main options when it comes to remunerating themselves: salary and dividends. Below we discuss factors to consider when deciding on your remuneration options.
Salary is an expense to the corporation and income to the individual. This expense is deductible to the corporation resulting in a reduction to the corporate tax expense. When it is time to pay personal taxes, you are paying at the normal personal tax rates instead of the preferred dividend tax rates.
Dividends are not deductible to the corporation; they are payments to shareholders from funds that have already been taxed at the corporate level. As your corporation has been taxed once already, you pay a lower tax rate your personally on dividend income vs. salary.
The goal of the income tax act is to have perfect integration; that is to make the difference between paying salary vs. dividends minimal. Because there are so many factors involved, calculations and considerations need to be made to ensure the optimal strategy is undertaken.
|Creates RRSP contribution room||Monthly source deduction remittance and annual filing to the CRA is required|
|Allows you to deduct child care expenses personally||Requirement to pay both employer and employee portion of CPP, possibly EHT|
|Builds CPP income in retirement||Discretionary salary can be paid only to professional only, cannot pay family members discretionary salary|
|Typically less expensive than salary when corporate income is below $500,000||Does not create RRSP contribution room|
|Does not require monthly source deductions filing or payments to the CRA||Does not allow you to deduct child care expenses personally|
|Does not attract additional taxes that payroll attracts (CPP and EHT)||Does not build CPP income in retirement|
|No requirement to contribute employer and employer portion of CPP (approx. $5,200 annually)||Limited ability to pay family members discretionary amount|
Your corporation will pay 13.5% tax on the first $500,000 of taxable income in 2018. This low rate of tax provides a substantial tax deferral opportunity when weighed against the top personal tax bracket of 53.5%. Generally speaking, profits should be retained in your corporation if not required to cover personal expenses, though you should also consider any sizeable future cash needs (e.g. house down payment).
If your corporation earns $500,000 of taxable income or less, you are left with more cash in your hands personally if you remunerate yourself through dividends compared to salary, as per the chart below.
|Dividends ($)||Salary ($)|
|Corporate taxable Income||500,000||500,000|
|Salary & employer CPP||-||(231,214)|
|Corporate tax (13.5%)|
|Corporate income retained||225,000||225,000|
|Salary less employee CPP||-||226,120|
|Net cash on hand||142,544||140,736|
Over $500,000 threshold
Your corporation will pay 26.5% tax on taxable income over $500,000. Retaining funds in your corporation still provides a tax deferral opportunity compared to the top personal tax bracket of 53.5%.
If your corporation earns more than $500,000 of taxable income, remuneration through salary results in more cash in your hands personally compared to dividends. However, if you have a spouse or family members with minimal income, the opportunity to split income through dividends makes salary remuneration beneficial only when taking into account the administrative burden. The below chart compares dividends and salary remuneration of a single shareholder with $1M of taxable income.
|Dividends ($)||Salary ($)|
|Corporate taxable Income||800,000||800,000|
|Salary incl. employer CPP||-||(272,108)|
|Corporate tax (13.5% first $500K/26.5% over $500K)|
|Corporate funds retained||453,000||453,000|
|Salary less CPP||-||267,014|
|Net cash on hand||157,536||159,740|
The choice of remuneration is not always clear. Many factors come into play, and your personal and professional plans can change year to year. We are always willing to take the time to find the option that suites you best.