Salary vs. Dividends | How to Pay Yourself?

A Guide for Canadian Business Owners on Choosing the Right Payment Method to pay the least tax.

Alright, let's break down the whole salary vs. dividends debate for business owners in Canada 🇨🇦, shall we? If you’re running a business through a corporation, you've got three main ways to pay yourself: salary, dividends, or a bit of both. But which one to choose? Let's dive in!

Salary vs. Dividends | How to Pay Yourself?

Paying Yourself a Salary: Think of a salary as your steady paycheck. It's like a warm blanket—predictable and comforting. You get a T4 slip for your taxes, and your corporation treats your salary as an expense, which lowers its taxable income. Plus, paying a salary builds your RRSP contribution room and sets you up for CPP contributions. But it's not all roses—CPP contributions mean less cash now, though more benefits later. And, hey, no surprise tax bills at the end of the year because taxes are withheld upfront. Also, banks love seeing that regular income when you're applying for a mortgage.

Opting for Dividends: Dividends are like the cool, laid-back uncle of salaries. They come from the corporation’s after-tax earnings, so they don't lower corporate taxes but are taxed less personally. No need to fuss with payroll accounts or source deductions, just declare a dividend and transfer cash. Dividends are simpler and cut down on those pesky late payroll penalties. But, there's no building RRSP room or CPP with dividends, so it's more cash now, less later. Also, if you hate admin tasks, dividends save you from monthly remittance headaches.

Salary vs. Dividends Tax Talk: The tax man has a concept called "integration," which aims to balance the tax scales whether you choose salary or dividends. The idea is that the overall tax (corporate plus personal) should be roughly the same regardless of your choice. So, while dividends might mean less personal tax now, salaries could mean more corporate tax savings.

Choosing Between Them, which one’s better? That old chestnut of a question! The truth is, it depends on your personal situation. Want to keep things simple and avoid payroll paperwork? Dividends might be your jam. Need steady income for a mortgage or want to contribute to your RRSP and CPP? Salary could be the way to go.

In the End, choosing between salary and dividends is like picking between chocolate and vanilla—both have their sweet spots. It all depends on your financial goals and personal preferences. But remember, you can always mix and match to get the best of both worlds. So, what's it gonna be? Salary, dividends, or a tasty blend of both? The choice is yours, boss!

Got more questions or need someone to help you wrestle those pesky bookkeeping monsters into submission? Why not give Bean Counter Bookkeeping a shout? We are offering a free, no-strings-attached consultation—because who doesn't love free stuff, right?