If you are a small business owner, you have likely wondered how you should get paid from your corporations, and the two most common ways are through a salary or dividend. In some cases, it can also be a mix of both, so you have to understand this information to determine which option is best for you.
If you decide to pay yourself a salary from your corporation, this payment will be a tax-deductible expense for the corporation. It will be included as an employment income on your personal taxes. There are a number of effects with this option, and your corporation will be able to deduct this expense to reach its taxable income. Salary would also be an employment income on the personal tax returns of the recipient, so it would be taxed accordingly. Additionally, businesses must make deductions from the salary payments, including federal income tax and CPP and must contribute to the employer’s share of CPP, and both these deductions and contributions must be remitted to the Canada Revenue Agency on a periodic basis. Failure to do so can result in penalties. Finally, the business must issue a T4 slip to you and must file an information return with the CRA at the end of the year.
It’s important to note that a salary will contribute to your RRSP limit and Canada Pension Plan, and both will help with retirement planning.
On the other hand, dividends are paid from the earnings of the corporation, and if you decide to pay yourself through this option, you would not be eligible for any deductions at a corporate level. At the end of every year, the corporation must file a T5 with the Canada Revenue Agency and determine amounts related to the type of dividend, the taxable amount of dividends, and dividend tax credit. Your corporation must also comply with jurisdiction law where it operates regarding the dividend issuance, and if you pay yourself only through dividends, it would be hard to get a personal credit like a mortgage, for example, because employment income would be non-existent.
Dividends will not contribute towards your RRSP limit, and no CPP contributions and deductions will be made towards this.
If you’re trying to determine which approach will provide you with the best tax outcome. In that case, this will depend on your corporation and personal tax situation, and you can always create your own mix of both a salary and dividend as long as you are aware of the effects of both on your personal tax situation.
If you require more information, the experts at Oasis LLP can help. Our Professional Chartered Accountants will discuss the details of both options to help you make an informed decision that would best suit your goals. We will make sure you know the advantages and disadvantages and provide you with personalized accounting services, so if you want to work with a reputable team, contact us today!
