Dividends vs. Salaries

Some of the advantages of dividends

  • Dividends may slightly reduce the overall tax costs (corporate and personal) as compared with salary
  • If the only source of personal income was from ineligible dividends, it was possible to receive up to $33,308 in 2017 without paying any personal income tax other than the Ontario Health Premium. (Eligible = $51,635)
  • Dividends do not require you to contribute to the Canada Pension Plan (CPP), Employer Health Tax (EHT) or the Workplace Safety and Insurance Board (WSIB)
  • Dividends will provide more opportunities for income splitting with your family
  • Dividends do not require the recipient to perform services for the business, whereas salaries must not exceed a “reasonable” remuneration for the services rendered to the business
  • The payment of dividends does not require an immediate personal income tax payment; salaries require income tax and CPP amounts to be withheld by the employer and remitted within days or weeks
  • If there are insufficient corporate profits to make use of the tax deduction for salaries, dividends may be more tax-efficient

 

Some of the advantages of salaries

  • Salaries provide opportunities for deferring taxes by maximizing RRSP contribution room
  • Corporate taxes can be deferred by accruing bonuses
  • Salaries are required to qualify for future Canada Pension Plan benefits
  • The distribution of salaries among shareholders may be more flexible than dividends
  • Salaries paid to children are taxable at normal rates, whereas dividends paid to children may be subject to tax at the highest rates
  • Salaries entitle the recipient to the Canada employment credit
  • If the company’s taxable income exceeds $500,000, salaries can reduce that income to eliminate any corporate income tax that would be payable at the higher corporate income tax rates
  • A requirement for quarterly personal income tax instalments in future years may be one result of paying dividends
  • If personal income is so low that the dividend tax credit would be unused, a salary may be more tax efficient