|We have found that there’s a lot of misconceptions among business owners between the difference of salary and dividend. Our financial advisors in Calgary can help.|
At the end of the day, business owners will need to decide how to pay themselves and it may be through salary, dividend, or a combination of both.
Through the theory of ‘integration’ whether you pay yourself via salary (personal tax) or dividend (personal and corporate tax), your net taxes paid should roughly equal the exact same.
This doesn’t always hold true however and it’s good to run the numbers to see what would be more beneficial for yourself.
There are also pros and cons to each method which we’ll discuss at the end of this email.
Let’s use an example here:
Joe is an established dentist in Alberta who has earned $200,000 before tax profits within his corporation and he is wondering what the best method to pay himself $60,000 out of his corporation will be, let’s run the numbers using salary and non-eligible dividends.
|As you can see the theory of integration holds mostly true in this example.|
The shareholder will have $7,414 more personally but $3,093 less in retained earnings in the corporation when he pays himself out with non-eligible dividends.
There are some pros and cons with each method which I’ll discuss below:
-You have the added cost of CPP and EI from both the employer and employee side, however you also have the benefits of both CPP and EI which can be quite valuable
-You also have the cost of setting up a payroll account with Canada Revenue Agency
-Salaries create RRSP contribution room which can be a valuable planning tool for retirement
-Most insurance companies want to see a salary for benefits such as disability insurance
-Most banks want to see salary as the income for loans
-Doesn’t have the added costs of CPP or EI, however also will not receive the benefit
-Depending on circumstances, can come up slightly ahead of salary in terms of net income to the shareholder
-Much more flexibility as you can pay dividends as you please without any schedule
-Doesn’t create RRSP contribution room
-Creates some problems with banks and insurance companies
Summary: What’s the correct way to pay yourself?
As you can see it’s a bit more complicated of an answer than simply one way or the other. It may be true that a combination of both salary and dividend is the best option.
However, your personal and corporate circumstances will vary the answer to this greatly.
The best option is to explore the different possibilities with your accountant or give us a call to discuss this further.
If you have questions about financial planning in Calgary and wealth management in Calgary or would like to explore your options, connect with us to speak with a financial advisor in Calgary and get the answers you need to achieve your goals.