Salary VS Dividends

December 23, 2024•2 min read

Salary VS Dividends

Which is Better for You as a Business Owner?

As a business owner, deciding how to pay yourself is a critical financial strategy that impacts both your personal and corporate finances. Two common options - salary vs dividends - each have unique advantages and considerations. Choosing the best approach depends on you personal needs, financial goals and the state of your business.

Let's break it down so you can make an informed decision.

What is a Salary?

A salary is a fixed paycheck that makes you an employee of your corporation. It's classified as earned income, subject to income tax and CPP (Canada Pension Plan) contributions. While this means deductions from your paycheck, it also generates RRSP room, enabling you to contribute toward your retirement.

For your business, salaries are tax-deductible expenses, reducing corporate tax liability.

What are Dividends?

Dividends are payments made from your corporation's profits to you - the shareholder. These can be issues periodically or at year-end. Unlike salaries, dividends are not subject to CPP contributions, which means more immediate cash flow for you.

However, dividends are not tax -deductible for your corporation.

Factors to Consider

Cash Flow Needs

Salary: Offers a consistent income stream, making personal budgeting and obtaining loans, line of credit, or mortgages easier. Banks typically prefer steady income over dividend income.
Dividends: Provide flexibility and immediate cash flow. However they can be irregular and depend on the corporation's profitability.

Retirement Planning

Salary: Contributions to CPP and RRSP room creation (18% of your salary annually) helps secure long-term retirement savings.
Dividends: Skipping CPP contributions gives more cash now, but it's essential to have an alternative retirement savings plan in place.

Corporate Finances

Salary: Allowed regardless of the corporation's profitability, as it is treated as an expense for the business.
Dividends: Can only be paid from after-tax profits. If the corporation lacks retained earnings, issuing dividends is unlawful and must be repaid.

Tax Efficiency

Salary: Offers tax deductions for the corporation and helps with personal tax preparation by prepaying income tax. It also qualifies for deductions like childcare expenses.
Dividends: Taxed at a lower rate than salary since corporate tax has already been paid. They're simpler to manage because they do not require payroll remittances or T4 filing.

Conclusion: What's the Best Option For You?

The decision between salary and dividends depends on your personal financial goals, corporate structure, and long-term plans. Often, a combination of both can provide the best balance, optimizing cash flow, retirement savings and tax efficiency.

Before making your decision, consult with a financial advisor or tax professional to ensure your approach aligns with your unique circumstances. By understanding the pros and cons of salary vs dividends, you can set yourself up for financial success - both personally and professionally.

Lynn Morgan

Lynn is highly skilled in accounting and financial management, holding certifications such as Certified Professional Bookkeeper and Quickbooks Online Advanced Advisor. She has achieved the 5th level of the Certified General Accountant (CGA) designation and holds a Business Administration Diploma with an Accounting major.

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