After putting in long hours building your business, you naturally want to reap the benefits. However, the way you “take the money out” has different implications. Deciding between a salary, a dividend, or a mix of both is a strategic decision that can significantly affect your personal wealth.

Comparison Summary

Salary

• Considered a business expense, which reduces corporate profit
• Requires the business to withhold and remit CPP and income tax
• More complex due to payroll setup and ongoing remittances
• Creates RRSP contribution room and increases CPP benefits
• Taxes are deducted at every pay period

Dividends

• Paid from after-tax corporate income
• No source deductions required by the company (for residents)
• Lower complexity, as dividends are simply declared and paid
• No RRSP room or CPP contributions, requiring more retirement planning
• Taxes are paid at the filing due date or through installments

Understanding Salary

Salary is considered “earned income,” which provides several advantages. Paying yourself a salary increases your RRSP contribution room. While CPP contributions are an added cost today, they make you eligible for government pension benefits in retirement. Salary also allows you to claim certain personal tax deductions, such as the Child Care Expense.

There is also liability protection: if the corporation has unpaid CRA debt, the CRA generally cannot pursue a shareholder’s salary. These benefits are limited or unavailable when you pay yourself through dividends.

The downside is complexity. Paying a salary requires the business to withhold income tax and CPP, pay the employer portion of CPP, and remit all amounts on time. Late or missed remittances can result in CRA penalties.

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Understanding Dividends

Dividends are paid from the retained earnings of your corporation. They can be non-eligible (default), eligible, and/or capital dividends (tax-free).

Dividends have lower immediate costs because there is no employer or employee portion of CPP to remit. Due to the dividend tax credit and the basic personal amount, you can pay yourself approximately $37,000 in non-eligible dividends, $57,000 in eligible dividends, or a combination of both, with little to no personal income tax.

If your corporation has a Refundable Dividend Tax on Hand (RDTOH) balance, paying dividends may also trigger a corporate tax refund.

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After-Tax Cash Comparison

Below are approximate after-tax amounts after considering deductions and taxes. Actual results may vary based on your personal and business situation.

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$37,000

• After-Tax Salary: $30,000
• After-Tax Dividend: $32,500
• Dividend Advantage: $2,500
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$80,000

• After-Tax Salary: $60,000
• After-Tax Dividend: $66,500
• Dividend Advantage: $6,500
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$100,000

• After-Tax Salary: $73,500
• After-Tax Dividend: $81,000
• Dividend Advantage: $7,500
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$150,000

• After-Tax Salary: $105,000
• After-Tax Dividend: $112,000
• Dividend Advantage: $7,000

Make the Choice

While dividends often provide more cash in the short term, relying solely on them can cause you to miss out on the long-term advantages of paying yourself a salary. There is no one-size-fits-all solution. A hybrid approach may be appropriate depending on:

• Your cash flow needs
• Your retirement goals
• Your eligibility for specific personal tax credits
• Your ability to manage administrative complexity

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Don’t leave money on the table. If you’re interested in a tailored plan, contact Orion Inc. at info@orioninc.ca or  or call 365.809.0334.