Salary or Dividend?: How to Choose the Best Method for Paying Yourself as the Owner of a Private Corporation
A small business owner operating through a corporation can choose to pay themselves through a salary or through dividends – or a combination of both.
Salary: a fixed and regular payment made by an employer to an employee
Dividend: a sum of money paid by a company to its shareholders
Should I pay myself a salary?
A small business owner can pay themselves a salary by having the corporation hire them as an employee. In order to pay yourself in this way, the corporation must register a payroll account with the Canada Revenue Agency (CRA). The corporation must also withhold and remit taxes to the CRA each time a salary is paid.
One advantage of paying yourself a salary is that salaries build Registered Retirement Savings Plan (RRSP) contribution room.
Paying yourself through a salary also requires payment of CPP by both the company and the employee. As a business owner, this means you are paying double the CPP contributions than you would if you were simply an employee of another business. Contributing to CPP can be viewed as both an advantage or disadvantage, depending on the perspective of the business owner – it means more payments now but also entitles you to a government pension when you retire.
Should I pay myself through dividends?
Dividends are paid to shareholders of a corporation when the corporation, through its board of directors, declares the payment of a dividend. All holders of the same class of shares are eligible to receive the dividend declared for that class of shares. If you are a sole business owner and own all of the shares of your corporation, this typically should not cause any issues. The following example is sufficient to explain the most basic situation:
John owns 100 common shares
The Corporation declares a dividend of $10 on each common share
John receives $1,000 in dividends ($10 x 100 common shares)
If you pay yourself entirely through dividends, you do not need to make any CPP payments – this also means you will not receive a government pension after retirement. Additionally, dividend income does not build RRSP contribution room.
Which is better for me and my business?
That depends entirely on your business, your objectives, and preferences. Paying a salary, and thus making CPP contributions, can force you to create a future safety net in the form of a government pension. Dividends can give you greater flexibility but may result in more surprises when tax season comes around. The important thing is to understand that there are options available to you and make an informed decision when it comes to paying yourself as a business owner.
The above is not intended as legal advice and should not be interpreted as such. Please consult a lawyer to get an opinion and advice tailored to your unique circumstances and objectives.
