Salary Versus Dividends

Whether you should receive salary or dividends in Canada depends on several factors, including your business structure, personal financial situation, and tax considerations.

Here are some general points to consider:

Advantages of Dividends:

1. Dividend Tax Credit: Dividends from Canadian corporations are eligible for a dividend tax credit, which can result in lower taxes personally compared to other forms of income like salary. On the other hand, taxes are higher for the corporation as dividends are not a deductible expense. 
2. Avoiding CPP Contributions: Shareholders who receive dividends are not required to pay Canada Pension Plan (CPP) contributions, potentially resulting in savings.
3. Flexibility: Companies have more flexibility in determining the timing and amount of dividend payouts compared to fixed salary payments.

Disadvantages of Dividends:

1. Retirement Benefits: Receiving dividends doesn't contribute to Canada Pension Plan (CPP) contributions, potentially affecting your eligibility for CPP benefits in the future.
2. RRSP Contribution Room: Dividend income is not considered earned income and therefore does not generate Registered Retirement Savings Plan (RRSP) contribution room.
3. Unstable Taxation: Unlike salary, there are no regular income tax withholdings and therefore the tax liability must be planned for in advance to ensure enough is saved for the tax liability. 

Advantages of Salary:

1. Contributions to Canada Pension Plan (CPP): Receiving a salary allows you to contribute to the Canada Pension Plan (CPP), which can provide you with retirement benefits and disability coverage in the future.
2. Consistency for Loan Applications: A steady salary can make it easier to qualify for loans, mortgages, and other forms of credit, as it demonstrates a reliable source of income.
3. RRSP Contribution Room: Salary is earned income and generates Registered Retirement Savings Plan (RRSP) contribution room. 
4. Stable Taxation: Salary income is subject to regular income tax withholding by your employer throughout the year, making it easier to predict and manage your tax liability.

Disadvantages of Salary:

1. Higher Taxation: Salary income is typically taxed at a higher rate personally compared to dividend income due to the lack of dividend tax credit. From the corporation’s standpoint, taxes will be lower as salary is a deductible expense. 
2. CPP Contributions: While contributing to CPP provides benefits, it also means higher deductions from your salary, reducing your take-home pay.
3. Administrative Burden: Employers must remit the withheld income tax, CPP, and EI contributions to the Canada Revenue Agency (CRA) on a regular basis. Failing to do so a timely basis can result in penalties and interest. 

Canada's tax system aims to ensure that the total tax paid is similar regardless of whether income is received as salary or dividends, due to the dividend tax credit system. However, individual circumstances can influence the actual tax outcomes. Tax laws and regulations can change, and personal circumstances vary, so seeking advice from a qualified tax professional is advisable to ensure you're making informed financial decisions. Please Contact Us for more information.