Bob Gauvreau compares salary versus dividends for business owners. Salary gets taxed higher and triggers CPP withholdings, while dividends distribute corporate earnings with different tax treatment. The right choice depends on your goals and tax situation, so talk to a professional.
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. The other side is as an owner, you can be compensated from the distribution of earnings from the company, which comes out as 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 tax 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. 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. So it's really important to understand what your needs are and what your objectives are with your compensation. 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.
