As you establish your small Canadian business you will have the choice of how to pay yourself.  The options are to take a salary, receive dividends, or both. There are pros and cons to any of the three selections.

Salary

Benefits include:

•  You can contribute to the Canada Pension Plan (CPP).  If you plan to work for an extended period and/or contribute a fair amount, you could be compiling a nice retirement plan.

•  Your salary or bonus is a corporate tax deduction.

•  Income splitting with family members will be allowed.

•  Other retirement options include contributing to a Registered Retirement Savings Plan (RRSP) or a tax-free savings account (TFSA).

Disadvantages:

•  The salary is 100% taxable on your personal income taxes.

•  For the Canada Pension Plan (CCP), you will need to contribute both sides since you are both the employer and employee.

•  You must be included in a payroll account for the CRA, even if you are the only employee. That could be a lot of paperwork.

Dividends

Benefits:

•  Dividends are in a lower tax rate than a salary.

•  Dividends can be declared at any time.  That means you can schedule your disbursements when you need them.  This creates a great deal of flexibility in both personal and corporate cash flow.

•  Eliminating the CPP payments can help with cash flow.

•  Paying dividends is very simple.  You write a check to yourself from the corporation and update the Minute Book and prepare a director's resolution. 

Disadvantages:

•  Not paying into the CPP will reduce the retirement benefits.

•  You will not be able to contribute to an RRSP.

•  Dividends instead of a salary may eliminate the opportunity to claim income tax deductions, like child care.

•  You will need to be methodical about saving for your retirement.

•  Dividends are not considered for line of credit or mortgage applications.

Combination Payments

In Canada, the small business earnings limit is $500,000.  Earnings below that level allow the corporation to pay tax at a much lower rate.  Paying a salary or dividends can help keep the corporation under that $500,000 threshold.  Which option you choose depends on your personal finances.  Some of the areas you may want to consider include:

•  Current income level

•  Current and future income needs

•  Corporate cash flow needs

•  Projected earnings

•  Personal cash needs

•  Age

As you can tell, this process takes much consideration and careful planning.  A good place to start is an appointment with your legal advisor and accountant.  Together they can help you make the best decision based on your current and projected circumstances. 

Capex CPA has extensive experience working with start ups, small businesses, and expanding operations.  They will be a good source of information as you make this critical decision.  Contact us to arrange for a convenient time to discuss the various options and how they will impact your business and personal finances in both the short and long term.

Contact your Accountants today click on this link —> https://capexcpa.com/contact