When you run a corporation you gain a tremendous amount of benefits. You can save on your taxes in various ways when you run a corporation or even a small business.
One particular way you can save money through your corporation is by deciding whether it’s best to pay yourself a salary or whether it’s best for you to pay yourself through dividends.
What is the Difference Between Salary and Dividends?
Naturally, most Canadians already know what a salary is. A salary is a fixed amount of money which is deposited into your account on a regular basis (usually monthly or bi-weekly). A dividend, on the other hand, is not a fixed amount of money, but it is a sum which is agreed upon and paid to the shareholders of the company (generally on a quarterly basis).
Pros of Paying yourself Dividends
Paying yourself in dividends has some attractive benefits to it.
- First of all, if you pay yourself in dividends you can get away without having to pay tax on the first $33,000 you withdraw. that’s a huge amount of saving right there.
- Secondly, it is fairly simple for you to pay yourself a dividend. All you have to do is write yourself a cheque, record the transaction, and then fill out a fairly basic accounting form. You can do this yourself or have an accountant help you out. Either way, the process is very brief and simple.
- When you pay yourself dividends you don’t have to give any portion of it for your Canadian pension Plan. Once again, this can help you save big as well.
Paying yourself Dividends does have its advantages but paying yourself a salary has its advantages as well.
Pros of Paying Yourself a Salary
- Your salary is a very valuable and trusted source of income. Whenever you run into any problems with loan services, mortgages, or the CRA, your pay stubs and earned salary is a very strong support to back up your claims and help prove your point. With a good salary in your documents, you can easily qualify and apply for important factors such as a mortgage if need be. Your salary also enables you to apply strategies which involve income-splitting with your family.
- Since salaries are an expense for your corporation, any salary that you pay out can be tax deductible and lead to you saving some money on your taxes.
- Your salary increases the room you have for your Registered Retirement Savings Plan (RRSP) and you also increase your entitlement to the Canada Pension Plan (CPP)
Now that we’ve looked at the pros of both it might be becoming more clear to you on whether or not you want to pay yourself a salary or dividend depending on your situation. however, it would only make sense to look at the cons or the negatives that you could possibly encounter by selecting one or the other.
Cons of Paying yourself a Salary
- The first con that comes to most people’s mind is that they will naturally have to pay personal income tax on the salary which they earn. not to mention that your CPP will also be taken out of your salary and this can amount to a significant reduction of income every month.
- Paying salary requires more paperwork with payroll, tax deductions, remittances and everything included. It can be troublesome to do it yourself.
Cons of Paying yourself Dividends
- The most obvious con is the lack of CPP. Since no CPP go from your pay you obviously will not get a pension. You also can not claim childcare costs due to not having a salary.
So Should I Pay Myself a Salary or Dividends?
By analyzing the information above you can clearly see that both have their own advantages and disadvantages. If this information is not enough to convince you, contacting a financial expert or accountant is a great idea.