There are many factors to consider when determining what remuneration strategy is right for you. Please see the topics below for a discussion of the various factors that play into the discussion.
Immediate Costs
Factors encouraging dividends:
- Paying salaries generally come with more additional immediate costs than dividends. CPP will need to be withheld, and the matching employer portion will have to be paid. This totals 11.4% of the first $64,900 of earnings for 2022 (less the $3,500 basic personal amount), resulting in as much as $6.999.60 paid per employee shareholder.
Other Deductions And Credits
Some deductions are available against salaries, but not dividends.
Factors encouraging salaries:
- Child care costs, moving expenses, disability supports deduction, and employment expenses cannot be deducted against dividends, but can be deducted against salaries.
Factors encouraging dividends:
- RDTOH accumulated on a CCPC’s investment income can be recovered by payment of dividends.
Personal Life
Factors encouraging salaries:
- As the Canada child benefit is eroded by net income, the dividend gross-up can result in reduced eligibility for these benefits.
- Mortgage and loan applications can often be improved where a consistent level of salaries is demonstrated.
Factors encouraging dividends:
- Disability insurance benefits may be reduced by earned income, such as salaries, but unaffected by dividends.
Retirement Savings
Factors encouraging salaries:
- CPP retirement and disability payments are based on pensionable earnings which can only be generated with salaries, not dividends. For those of you who spend money as fast as you can earn it, CPP may form the backbone of your retirement income.
- RRSP and Individual Pension Plan contribution room is generated by salaries, not by dividends. On the other hand, simply retaining the cash in the corporation rather than contributing to an RRSP can offer extra investment flexibility as it is not restricted by the RRSP rules.
Low Tax Brackets
Factors encouraging salaries:
- The maximum Canada employment tax credit is obtained once an individual receives $1,287 for 2022 employment income.
- Dividend tax credits (DTC’s) may be wasted. When income levels are too low, the DTC’s may not be fully utilized, meaning that the taxpayer will not receive full credit for the corporate tax paid.
Risk Of Business Failure
Factor encouraging salaries:
- Section 160 protection is available for salary but not dividend payments. Where a person receives assets (including dividends) from a non-arm’s length person who owes taxes, the recipient becomes jointly and severally liable for the transferor’s tax debts. The liability is limited to the excess of the fair market value of the property received over the consideration provided for the property (which would likely be $0 in the case of a dividend).
Factor encouraging dividends:
- Unusable losses may be generated if a salary is taken and there is no expected positive earnings against which it can be offset. This means that personal tax will be paid without the tax benefits of a corporate tax reduction.
Administrative Or Organizational Sophistication
Factors encouraging salaries:
- Less surprises will occur at tax time if regular salary is taken and the remittances are automatically submitted. On the other hand, id dividends are paid, not enough cash may be on hand to pay the personal tax bill when due.
- Personal instalment payment requirements may be triggered if dividends are paid since there is a higher chance that more than $3,000 will be due when filing personal tax returns.
- Corporate instalments will also be increased where a dividend strategy is followed.
Factors encouraging dividends:
- Registration for a payroll account is required if salaries are paid.
- Payroll tax penalties are significant, and strictly applied. If the taxpayer has challenges with keeping organized and making regular remittances, the penalty costs range from 3% up to 10% if more than 7 days late. Further offences in a calendar year may cost 20%.
Involvement In The Business
Factors encouraging salaries:
- Non-taxable benefits and allowances (such as participation in a private health services plan and the receipt of non-acocuntable reasonable travl allowances) are available if received in the shareholder’s capacity as an employee.
- Tax on split income (TOSI) can be assessed at the highest marginal tax rate on the receipt of dividends, but not on salary. However, salary still needs to be reasonable to be deducted.
Strategies
- A 100% salary may be right for you if you already have other non-shareholder staff apart of operations and you are organized and like the idea of paying yourself a consistent wage. This will also be a benefit if you are looking to RRSP’s and CPP as significant retirement vehicles in the future.
- A 100% dividend strategy may be right for you if you do not want to use RRSP’s or CPP as retirement vehicles and do not want to remit monthly source deductions to the CRA. You may be interested in retaining more cash in your corporation and using it as your retirement vehicle.
- A mixed salary-dividend strategy may be right for you if you want to maximize the personal tax credits only applicable against earned income (such as the employment tax credit, child care and moving costs) by taking a minimal salary and then taking the remainder as a dividend or salary.
