Is It A Salary Or A Dividend That I Should Be Paying Myself From My Canadian Corporation?

If you pay yourself a salary from your Canadian corporation, it will have the following features:

• If you pay yourself a salary, it will be subject to CPP and EI deductions. The more you pay yourself in terms of salary, the higher the amount of CPP and EI entitlements you can receive.
• You will receive a T4 slip from your corporation and that is tax-deductible for your corporation.
• Since your salary is treated as earned income for RRSP purposes, the more you pay yourself in terms of salary, the more RRSP contribution room you will have.
• If you want to apply for a line of credit or a mortgage, paying yourself a salary would enable you to qualify for these financing options.
• If you have family members on the payroll of your corporation, you can use salary as income splitting strategies.

Apart from having the benefits of a salary, there are some disadvantages of paying yourself a salary from your corporation as follows:

• You need to hire a professional account to manage your payroll as per the pay period, calculate all payroll deductions, process payroll remittances to the CRA and issue T4 slips annually.
• Since your salary is subject to have CPP deductions, it can be a little expensive option to pay yourself a salary.
• Moreover, your salary income from your corporation is also subject to have income tax deductions.

If you pay yourself a dividend from your Canadian corporation, it will have the following features:

• The dividend is a cheaper option and you can earn up to $50,000 dividends without paying any taxes, provided you have no other source of income.
• Dividends are not subject to CPP and there is no administrative burden on you to manage it. To pay yourself a dividend, all you need to do is issue yourself a check from your corporation, enter it in your corporation's minute book, and file a T5 return.

Apart from having the benefits of a dividend, there are some disadvantages of paying yourself a dividend from your corporation as follows:

• Since you pay nothing as CPP while your corporation pays you a dividend, it will save you money in the short term, but it doesn't in the long term.
• If you have children and are paid only through dividends, you will not be eligible to claim childcare benefits because you do not have any earned income.

Finally, to pay dividends, your articles must allow the payment of dividends. Dividends are paid out of corporations from after-tax profits. As the corporation has already paid tax, taxing the shareholder on the full dividend income would not be reasonable. Hence, in order to prevent this, the gross-up and tax credit system has been created. It would not be a good strategy to go with just one option, you have to get a salary from your corporation for all the benefits mentioned above and you also need to withdraw dividends from you’re your corporation during the year for all the associated benefits. Your tax accountant will guide you on the amount and frequency of such payments and will optimize your corporate and personal income tax return as per the prevailing situation.