Should You Take A Salary or a Dividend?
For income, a small business owner can salary themselves or receive a dividend. This decision is not a superficial one, but rather a taxation-related dilemma. This choice is one small business owners have to make for themselves, unless they seek help from a personal advisor. This topic is one with a lot of intricacies.
Why consider dividends?
Dividends have the distinction of not being deducted through the Canadian Pension Plan (CPP). This has the advantage of placing more of your income into your pocket to do as you wish with it. This also has the disadvantage of you now having to manage your own finances in a manner that ensures you will have retirement savings. Dividends avoid employment insurance contributions as well, which has additional implications. Dividends are taxed at a lower rate as people receive a credit back to equalize some of the taxing that occurs on them.
Why consider salaries?
Dividends in some circumstances may be less beneficial than taking out a salary. Companies get taxed on how much they make. Dividends can get taxed as well. This leads to the organization’s earnings being taxed multiple times before reaching your hands; which is not ideal. Salaries are tax deductible (unlike dividends), leading the opposite phenomenon to occur. Salary tax moves the burden from the company to be dealt with in personal tax expense.
How much to take out with a salary?
If you are going with a salary, understanding where you want to set the salary is another important consideration. In order to reap the maximum benefits that having a taxed salary can provide you, there are certain benchmarks to consider. In order to maximize CPP benefits, it is required that you have a salary of at least $54,900. Maximizing the benefits of a Registered Retirement Savings Plan (RRSP) requires a salary of at least $144,500. A salary of $12,000+ qualifies for child tax credit. Taking advantage of maximizing benefits is ideal as you are pay into them and will receive a suboptimal return by not meeting their conditions.
It is often advisable to take both dividends and a salary. It is ideal to hit the $54,900 salary mark for CPP and possibly the $144,500 RRSP amount if the business can afford it. Small businesses need to ensure they are under the $500,000 level of income to retain their small business status; therefore keeping their small businesses tax credits. How much more of a dividend/salary should be taken depends on a lot of specific situational factors that are constantly changing; from both regulation and the business itself. Optimizing the dividend/salary amount is a constant process which has a lot of flexibility as the amounts you withdraw may be modified easily.