There is a basic concept in our tax system—by the time a dollar of corporate income earned lands in a shareholder’s jeans, the same rate of tax has been paid no matter how that income is paid out from the company.
This concept is called ‘integration’ and it is great in theory. However, it is imperfect.
Currently there is a tax advantage, starting at $100,000-$120,000 of income, to pay a salary over a dividend. This was much different a few years ago before the 2016 Federal Liberal government and 2016 Alberta NDP government started raising corporate and personal taxes. A few years ago it was more tax efficient to pay a dividend. As you can see, ‘integration’ is a flawed concept.
Advantages of Paying Salaries
- Taxes are withheld and paid to the CRA throughout the year, meaning that less tax and/or instalments are payable by the shareholder personally in April of the following year, generally making their tax burden easier to deal with.
- Salaries build RRSP room, allowing you to contribute to an RRSP. Dividends do not.
- Salaries require the payment of CPP by the company and employee, meaning that you will receive a government pension when you retire. Some may not view this as an advantage, but we generally do.
- It is currently more tax efficient to pay salaries than dividends.
- Payment by salary provides access to certain deductions, such as for childcare expenses.
Advantages of Dividends
- It’s an easier-to-manage process. You just take cash out of your company, call it a dividend, and there is no requirement for the company to withhold or remit tax on these payments.
- Dividends do not count as ‘earned income’ for certain programs, such as maternity leave. It is possible for a mother to receive dividend income without jeopardizing her access to these programs in many cases.
Talk to your accountant about what to do this year to help minimize taxes. Depending on the tax rate of the tax bracket you fall into, you may be better off choosing one or the other.