Bob Gauvreau breaks down salary versus dividends for Canadian business owners. Salary triggers CPP contributions (roughly $6,000 combined employer and employee) and higher personal tax, while dividends avoid CPP withholding but don't reduce corporate taxes. The right choice depends on your personal goals and tax situation.
Chapters
Okay, let's talk about compensation opportunities as a business owner from a corporation. So there's really two options. You can take a salary or you can take a dividend. Now a salary is essentially compensation as an employee, right? It's earning a wage, an hourly rate, a salary, a bonus, anything like that is considered a salary or a wage and that comes in as employment income. So the other side is as an owner, you can be compensated from the distribution of earnings from the company, which comes out as a dividend. Now what's the difference between the two? Well, clearly there's a different definition. But on your taxes, employment income or T4 income is actually taxed higher than dividend income. It also is subject to any withholding tax. Canada pension plan, potentially employment insurance if you're not exempt. So we look at that sort of employment income, it can be a little expensive. For example, I know for many employees as an employer, I pay half of their Canada pension plan contributions which cost me about $3,000 per employee a year. Really expensive to be an employer. The the employee also pays about $3,000 a year into the Canada pension plan contributions on their own behalf totaling about $6,000 ish a year, depending on inflation, depending on the rate. Now what happens with a dividend is it's not subject to Canada pension plan. Now as an employer and if I pay myself as an employee, I've got to pay both sides of that. So it cost me $6,000 and a year just to have a salary, a wage, a bonus from my corporation where I could take a dividend out and avoid all of that Canada pension plan contribution. So that's $6,000 a year. Now why would I want to do that? Right? Because Canada pension plan really is a future pension that you'd be eligible for from the government. Now you're not eligible until you're at least 67. At this point, if you're not earning it right now, and who knows how much that gets pushed back later on. And one of the questions is which way is more beneficial? Do we want to pay or do we want to keep that $6,000 and invest it in our tax free savings account every single year? And the answer is how long are you going to live? Right? It's a crystal ball sort of question for me. What I would rather do as a business owner is I would rather save the $6,000 now, put it into my tax free savings account, I control it if I need to reinvest that in the business because I can get a really good return on that Investment, I have that and I have access to it. Now I save the taxes and I can reinvest it or I can give it to my kids or whatever. When we give it to the government upfront, we kind of lose control as to how that's going to get administered and when it's going to get administered in the future. So again, payroll wages are taxed higher. They are a deduction inside the business. So for example, If I have $100,000 of income in the business, I take a $50,000 salary. That $50,000 is a deduction inside the business. So we pay tax in the business at $50,000 as a dividend distribution. If I pay myself $50,000 in dividends, we're not going to get that deduction. So I'm going to pay tax at the $100,000 mark inside the business. Now why would I want rate is going to be 12.2%. That's a really low amount on that salary amount I'm likely going to be paying 20 to 30% as a taxable income. So yes, I might save the 12% on that deduction, but I'm going to pay 25 to 30% on the other side. Dividends. If we can keep our dividends low, if we can keep it under 50,000, we essentially don't pay any tax you might owe $1,000 to for the entire year, which would put your tax rate super low. But if you can keep your dividends low, leave all the money inside the company, you avoid all of the tax required to pay on that on that dividend distribution. And you also don't pay Canada pension plan. So you're looking at saving tens of thousands of dollars by using a dividend strategy versus a salary bonus payroll related strategy. So it's really important to understand what your needs are and what your objectives are with your compensation. We have to be willing to say no to CPP and put that savings away for a later date. There's a few things that you have to understand. If you have more questions about it, make sure you meet with your tax professional. Our team would be happy to help. But compensation strategy is probably one of the highest opportunities to save tax for you and your family. So you need to make sure you're doing it the right way.
