Small business owners often ask if they should pay themselves with salary or dividends. The answer, as usual, depends on your particular financial situation and goals.
First of all remember that:
- Salaries build up RRSP room. Dividends do not.
- Salaries require contributions to CPP. Dividends do not.
Suppose you are a single taxpayer, you own your own corporation and the corporation has $100,000 available to pay out as salary or dividends.
- Using the whole $100,000 to be paid as salary
- Your personal tax bill would be $24,215 (including $2,426 CPP)
- The corporation would match the CPP for $2,426
- Total remittance to Canada Revenue = $26,641
- Using the whole $100,000 to be paid as dividends
- Your personal tax bill would be $10,610 (no CPP)
- The corporation’s tax bill would be $13,020 (no CPP)
- Total remittance to Canada Revenue = $23,630
It appears that all dividends incurs less tax BUT there is no contribution to CPP so unless you have a personal savings program you might be worse off in the long run by paying only dividends.
Your personal situation will be different than the above or any other person. Do not make your decision without comparing the tax consequences of each alternative. Give us a call. We can help sort out what’s best for you.