Salary vs. dividend: The best way to pay yourself | Baker Tilly Canada | Chartered Professional Accountants (2024)

FAQs

Salary vs. dividend: The best way to pay yourself | Baker Tilly Canada | Chartered Professional Accountants? ›

It really depends on your unique circ*mstances. If you're planning to apply for a home mortgage or loan, paying yourself a steady salary is the way to go. If you want to keep more cash in your corporation, paying yourself via dividends is the better option.

Advantages of Paying Salaries

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.

Owner's Draw: When a business owner withdraws money for personal purposes. Draws can take place on a schedule or as needed. Salary: Each standard pay period, the business owner cuts themselves a paycheque based on the fixed wage or sum of money they have determined for themselves.

With a salary, when you file your tax return, you will have already paid the income tax and avoided any surprise tax bills. This differs with dividends since income tax is not withheld and remitted, although you should expect to pay taxes to the Government.

The biggest difference between salary vs. dividends are: Unlike salary, you do not need to remit CPP or taxes on dividends at the source. Instead, you pay the personal income tax on dividends directly or as instalments (see above).

Eligible Dividends and Alternative Minimum Tax

AMT starts when the dividends reach $55,002 (2022 $54,403). Federal AMT is applicable for dividends above this amount, until the amount of the dividends reaches $175,218 (2022 $161,215), when the regular federal tax equals or exceeds the minimum amount.

As your career develops and you earn more, you'll face higher tax rates because of Canada's graduated tax system. One way to lower your household's tax liability is to consider income splitting. This works best if one spouse earns significantly more than the other spouse does.

For most businesses however, the best way to minimize your tax liability is to pay yourself as an employee with a designated salary. This allows you to only pay self-employment taxes on the salary you gave yourself — rather than the entire business' income.

A common alternate method to paying yourself a director's salary, if business profits allow, is by considering dividend payments, which can prove to be a tax-savvy strategy. Dividends can be franked or unfranked, which may impact your personal tax return depending on your shareholder's marginal rate.

Should I pay myself a salary? ›

“It is the most important decision that many business owners forget to make. It's difficult to pay yourself based on an informed decision that is right for both you and your business.” Her main piece of advice, though, is that owners should pay themselves something. “People must be paid for their work,” she says.

Double taxation occurs when taxes are levied twice on a single source of income. Often, this occurs when dividends are taxed. Like individuals, corporations pay taxes on annual earnings. If these corporations later pay out dividends to shareholders, those shareholders may have to pay income tax on them.

Regulation 105 requires Canadian entities to withhold taxes on income earned in Canada by non-residents. Banks and similar institutions withhold a 25% non-resident tax on interest, dividends, and pensions. Non-residents get an NR4 slip detailing gross income and withheld non-resident tax for certain income types.

Are dividends included in taxable income in Canada? When a shareholder receives a dividend, they must include it in their tax return. Dividends are federal and provincial taxes. The tax component of qualified dividends is taxed at 15.0198 percent, while the tax portion of non-eligible dividends is taxed at 9.031%.

Canadian Income Tax Rates Are the Same for Sole Proprietors and Employed Individuals. When you are self-employed as a “sole-proprietorship” there is actually no difference between you and your business as far as the Canada Revenue Agency (CRA) is concerned.

Dividends are taxable income

Luckily, dividends received by a Canadian resident from a Canadian business get special treatment with something called the dividend tax credit. On the other hand, dividends you receive from foreign corporations get taxed at your highest marginal rate.

How dividends are taxed depends on your income, filing status and whether the dividend is qualified or nonqualified. Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%.