Navigating the decision between taking a salary or dividends from your corporation in Canada involves a strategic analysis of tax implications and compliance requirements. This blog highlights the benefits and considerations of each option to optimize your financial outcomes.
Who is it for?
- Small business owners
- Entrepreneurs
- Corporate shareholders
Keep reading if you are…
- Evaluating compensation strategies for your business
- Seeking to understand tax implications of salaries vs. dividends
- Interested in optimizing your personal and business tax burden
Why does this matter to me? Choosing the right mix of salary and dividends can significantly impact your tax efficiency and compliance with Canadian tax laws, directly influencing your business’s financial health.
TLDR:
Deciding between salary and dividends from your corporation? Understand the tax benefits and legal requirements of each to make an informed choice that enhances your financial strategy and ensures compliance with Canadian laws.
What Are the Considerations When Taking Salary or Dividends in My Corporation?
When taking salary or dividends from a corporation in Canada, there are several tax and legal considerations to keep in mind:
- Tax rates: Salaries are considered a business expense and are tax-deductible, while dividends are not. However, the personal tax rate on dividends is typically lower than the tax rate on salary.
- Employment Insurance (EI) and Canada Pension Plan (CPP) contributions: Salaries are subject to EI and CPP contributions, while dividends are not.
- Annual salary vs dividends: If a corporation is making a profit, it is generally beneficial to take some of the profit as salary and some as dividends. This allows the shareholder to take advantage of the lower personal tax rate on dividends while still making EI and CPP contributions.
- Minimum salary: The Canada Revenue Agency (CRA) requires that a reasonable salary be paid to shareholders who are actively engaged in the business. This is to ensure that the shareholder is paying their fair share of taxes.
- Capital dividend account: Dividends paid out of the capital dividend account are tax-free for the shareholder.
- Timing: The timing of when salary and dividends are paid can affect the overall tax liability of the corporation and the shareholders.
- Keeping accurate records: Keeping accurate records of salary and dividends paid is important for tax compliance and also in case of an audit by the CRA.
- Consulting a professional: As the tax laws for salary and dividends can be complex and are subject to change, it is advisable to consult with a tax professional or accountant to ensure compliance and to plan for the most tax-efficient way to take money out of the corporation.
Making the right choice between salary and dividends requires careful consideration of your business’s financial status and your personal tax situation. At Purpose CPA, we specialize in providing tailored tax advice that aligns with your business goals. Don’t navigate these complex decisions alone—contact us today for expert guidance to ensure you maximize your earnings while remaining compliant with Canadian tax laws. Check out more about types of dividends in here.
