# Dividend Versus Salary



## davext (Apr 11, 2010)

Hi All,

I'm self employed, incorporated. What is the main differences between paying myself a dividend and a salary? advantages of each?

When does doing BOTH make sense? 

Any good books or places to find a very detailed explanation? 

I have been paying myself a salary but am considering paying myself a dividend as a type of bonus so that I put some money into my RRSP account.

Thanks!


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## Eclectic12 (Oct 20, 2010)

First the disclaimer - I'm not an expert so if anything I write sounds appealing, make sure you check it out with the appropriate authorities. 


Re: Differences between being paid a salary versus dividend by my incorporation

Salary is 100% taxable, Dividends are tax at a smaller percentage. 
Salary has a pro of building RRSP room and a con of how much is taxed.
Dividends are the opposite.

Also - I recall reading once that you could pay yourself a certain amount of dividends per year without paying tax. I'm not sure if there were steps required to set this up.


Re: When does both make sense?

Hmmm ... I could see where if you paid the whole amount as salary, you might be pushed into a higher tax bracket but using dividends for a part might keep you in the lower tax bracket.


Re: Good books ...

I haven't needed to investigate so sorry, no ideas other than checking with an accountant or googling it.


Re: Pay Dividends as bonus to put in RRSP

Bear in mind that the Dividends will increase your income more slowly and thus your RRSP room. As long as the RRSP room exists, the dividends would minimize the tax hit compared to salary. Though I would investigate the tax-free dividends first.

Here's a couple of links that might help:
http://accxpert.canadaebiz.com/?p=278
http://blog.taxresource.ca/7-ways-to-get-money-out-of-your-corporation/


Cheers


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## Jademonkey (Apr 8, 2009)

From a Personal Perspective:
At the end of the day, it depends on how much you are going to pay yourself. Generally, it works out to being close to the same(at least that is the intent). Remember, if you pay yourself dividends, you do not get CPP and you cannot contribute to an RRSP. The easiest way is to calculate the amount you will want to pay yourself, and then calculate your income tax on that amount and compare it to the after tax cash from dividends (after calculating the tax - dividend tax credit). 

From a corporate perspective, remember that dividends are paid from after tax income, versus salary being deductible. So you will also need to take this into consideration(assuming you own the corporation and want to minimize the amount paid in corp taxes).


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## slacker (Mar 8, 2010)

http://cibc.com/ca/features/rethink-rrsps.html


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## kcowan (Jul 1, 2010)

There is not rule but a combination might make sense. The real value in dividends is when ownership in the corporation is shared in the family. then you are transferring income to dividends for lower earning individuals.


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## Square Root (Jan 30, 2010)

A little surprising you wouldn't have figured this out before you incorporated?


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## davext (Apr 11, 2010)

Square Root said:


> A little surprising you wouldn't have figured this out before you incorporated?


Good question, there are a couple of reasons:

1) Incorporate was not an option, it was mandatory for me before a contract could be signed with a client.


2) My accountant told me that they would work out to pretty much the same thing but I am hoping to be a little bit more strategic now that I've established significant savings.

Please keep the answers coming, thanks!


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## FrugalTrader (Oct 13, 2008)

dave, there are many answers to your question. Do you have a spouse? Is he/she a shareholder?

As others have mentioned, withdrawing as a dividend or salary will be very similar if you're calculating the overall tax. Dividend will mean less tax to you personally, but will come from corp after tax. Salary will be tax ded to your corp, but highly taxed personally.

The advantage comes when you have a spouse who is a shareholder (different class) who is in a lower tax bracket. That way, you can dividend out to your spouse as you please.

I've spoken to accountants about situations like yours, and a lot of them say, salary out to the maximum CPP amount, then dividend the rest. That way, you'd still accumulate CPP and RRSP room, but pay relatively minimal income tax.

Hope this helps!


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## Square Root (Jan 30, 2010)

Keep in mind that dividend tax rates are going up on eligible divs(not sure about small business divs). There was a good story on this issue in the G&M on Friday (I think). Also if you are edible for CPP the Corp will have to pay it's share and this will be quite expensive for what you get.


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## davext (Apr 11, 2010)

FrugalTrader said:


> dave, there are many answers to your question. Do you have a spouse? Is he/she a shareholder?
> 
> As others have mentioned, withdrawing as a dividend or salary will be very similar if you're calculating the overall tax. Dividend will mean less tax to you personally, but will come from corp after tax. Salary will be tax ded to your corp, but highly taxed personally.
> 
> ...


No spouse... yet but that will change in the next year. I'm the only shareholder. 

Right now I'm just making sure that I don't get paid more than $65,000 so that my marginal tax rate is no higher than 31.15%. With this salary, it's more than enough to maximize CPP but not RRSP room.


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## atrp2biz (Sep 22, 2010)

There is also the option of keeping money inside the corporation, thus deferring taxes on dividends (as many medicine corporations do).


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## CanadianCapitalist (Mar 31, 2009)

slacker said:


> http://cibc.com/ca/features/rethink-rrsps.html


The above article says that the differential between dividends and salary is 3% for Ontario. If you are drawing a $65,000 salary, it still works out to $2,000. That's quite a bit of change. It may be interesting to run the numbers for your situation with one of the tax software programs.


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## davext (Apr 11, 2010)

slacker said:


> http://cibc.com/ca/features/rethink-rrsps.html




I think the only way that I'll have some clarity is making a few models of different scenarios for specific to my own situation. 

Thanks!


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## heyjude (May 16, 2009)

Here's a site for incorporated physicians that might have some interest for you:

http://mdm.ca/solutions/financial-advice/incorporation/


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## shaileshjkumar (Aug 18, 2011)

davext said:


> I'm self employed, incorporated. What is the main differences between paying myself a dividend and a salary? advantages of each?
> 
> When does doing BOTH make sense?


I think the below link would solve your query.....

http://www.accountant-toronto.ca/blog/2011/01/salary-or-dividends-canada/

I was also searching for the same answer and found the link to be very useful...


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## Cal (Jun 17, 2009)

I know this may be the website record for delayed responses...but great link you provided above hey jude.


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## MoneyGal (Apr 24, 2009)

Crazy. See that book on the MD website on medical practice incorporation? I wrote that. (I just left a job at MD Management last month.)


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## mudman (Mar 23, 2011)

Depends if your a big spender or not, if you pay out all profits from the company every year to yourself in dividends, taxes are not much different. What I do is pay dividends to my wife (she has no other income) and myself just enough to live on (30,000 each) and pay little to no personal tax. I also pay myself $1500 in salary to take advantage of a workers tax credit (not sure of the proper name). I keep the rest inside the corporation taxed at 15% which will end up being my retirement fund paid out tax free in dividends, I plan on retiring before 50. I don't build any CPP or RRSP room but feel i'm better off for it. CPP won't be very much in the future as the government is broke from all the free loaders, remember you will have to pay the employee and employer share of CPP. As far as RRSP's go I feel taxes will be higher in the future then now, I will stick with TFSA and maybe draw down my current RRSP and not take anything from the company for a few years. For the first time in years i am now receiving child benefits because of my lower income. This works for me because I'm a saver, for others it may not.


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## kcowan (Jul 1, 2010)

mudman said:


> CPP won't be very much in the future as the government is broke from all the free loaders, remember you will have to pay the employee and employer share of CPP...


CPP recipients are not freeloaders. The freeloaders are GIS/OAS recipients and you will become one of those.


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## fraser (May 15, 2010)

CPP won't last much longer?????

Actually, CPP is not funded by the Government. It is entirely funded by employees and employers.

The CPP ranks among the top managed and financially stable plans in the world.


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## FrugalTrader (Oct 13, 2008)

Here is a good article about the longevity of CPP.

http://retirehappy.ca/will-canada-pension-plan-cpp-be-there/


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## MoreMiles (Apr 20, 2011)

If you take out dividends, you cannot deduct child care expenses. For some parents, this expense is $20,000 so why give up?


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## FrugalTrader (Oct 13, 2008)

Why can't you deduct child care expenses if you withdraw dividends from a company?


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## NorthKC (Apr 1, 2013)

Dividends are considered passive income.


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## MoneyGal (Apr 24, 2009)

Deductible against salary only. Honestly, most of the discussions around this topic do not consider all of the relevant variables, which are VERY specific to the individual and their province.


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## atrp2biz (Sep 22, 2010)

MoreMiles said:


> If you take out dividends, you cannot deduct child care expenses. For some parents, this expense is $20,000 so why give up?


"...the person with the lower *net income* (including zero income) must claim the child care expenses unless one of the situations in Part C or in Part D of the Form T778, Child Care Expenses Deduction, applies."
LINK

Dividends contribute to net income, no (it's grossed up after all)? Or does it have to be active income? Historically, we've claimed it against salary, but having a read at the link, now I'm wondering if it's possible with only dividends.


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## MoneyGal (Apr 24, 2009)

refer to section 1.41 of the CRA technical bulletin on child care expenses: http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c1-eng.html#N104CD

Quote (with added bold): 1.41 As indicated in ¶1.40 under the general rule, a taxpayer's claim for child care expenses for a year cannot exceed two-thirds of the taxpayer's *earned income* for that year. Earned income of a taxpayer for the purposes of the child care expense deduction is defined in subsection 63(3).

/quote

Dividends are not earned income.


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## MoneyGal (Apr 24, 2009)

As a general rule of tax policy, deductions (which reduce tax otherwise payable dollar-for-dollar) are only available against income which is fully-taxable, i.e., "ordinary income." If the income is already preferentially taxed, usually there is no capacity to take deductions against that income - just credits as applicable.


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## FrugalTrader (Oct 13, 2008)

For our situation last year, my wife made less salary than me, but after dividends from our company, she made higher "net income" which pushed the child care tax deduction to my return instead of hers. This was indicated by the tax software I was using, then later confirmed by my accountant. If the child care deduction is based on salary only, then why wouldn't the deduction be under my wife's name?


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## Spudd (Oct 11, 2011)

I just looked at the form. (Why do I get sucked into these things that don't apply to me?)

http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-13e.pdf

Basically what happens is that the person with the lowest net income needs to claim the expenses. However, on line 6 of Part B of the form, you enter your earned income and multiply by 2/3. Then you take the lowest of lines 4, 5, or 6 - so if your earned income is zero, then your claim is also zero.


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