As a business owner, one of the most important things to consider is paying yourself. The two forms of payment are dividends vs salary. Whether it’s in the form of dividends or salary, some advantages and disadvantages will need to be weighed before making a decision. This article goes over some factors you should consider when determining which method is suitable for you in your entrepreneurship journey.

The Salary Approach

As the business owner, you may decide to pay yourself a salary. The salary approach is straightforward and can also take advantage of tax deductions for things like health insurance and retirement contributions. However, the drawback is that you will be paying CPP as an employee and as the employer. CRA has a neat payroll deductions calculator to help you calculate your payroll liabilities.

In entrepreneurship, when entering the company’s payroll system, you will have to decide how much salary you want. Several factors should be considered before doing so:

  • Do I have any other sources of income?
  • What is my current tax bracket?
  • Do I require this income right away?
  • What are my longterm goals?
  • Do I need to show income at the personal level to qualify for personal loans like a mortgage?

The best time to pay yourself a salary is when the company becomes profitable enough. This way, you will not be required to put in money from your pocket.

The Dividends Approach

The dividends approach may seem appealing because it doesn’t have the same tax implications as a salary. This is because you are not required to withhold any taxes from a dividend payment. You are only required to report any dividends paid out by February 28 on a T5 slip. However, unlike payroll, dividend payments are not a business expense and hence do not reduce the corporate tax liability.

However, some things must be taken into consideration before using this method:

  • The company must be profitable before any dividends can be paid
  • Dividends are paid out of retained earnings. If you have negative retained earnings, you can not pay yourself a dividend.

You can choose one or both of these methods to pay yourself from your company. To better understand the most tax-efficient way to pay yourself, you will need to consult a professional. Be proactive and take charge of your financial situation today by booking a free consultation with us.

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