# Should I switch from dividend to salary to get CPP?



## ShannonC (Nov 16, 2012)

So I own my own business and right now am paying myself a dividend so haven't been putting money away for CPP. My accountant said that if I wanted to contribute to CPP, we'd have to move to salary, which would mean a higher tax rate, I think it's around 6k or so more tax. 

Do you think it's worth it to have CPP or better to go without and save the tax money and focus on investing elsewhere?


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## Ihatetaxes (May 5, 2010)

I do both. Take enough salary to get max RSP contribution limit and CPP and the rest I take in dividends.


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## stardancer (Apr 26, 2009)

You have to look at what's down the road when you retire. If your personal investments tank for a few years during retirement, at least CPP is a constant. You can have a 3 prong approach these days- CPP (and maybe OAS), RRSP, and TFSA. I use the government pensions (and work) as my bread and butter, the RIFs for extras and socking into the TFSAs. The purpose of the TFSAs is to supplement the RIFs later on when the withdrawals dwindle to almost nothing.


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## wendi1 (Oct 2, 2013)

The feds are removing the tax advantage of paying yourself with dividends.


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## OurBigFatWallet (Jan 20, 2014)

ShannonC said:


> So I own my own business and right now am paying myself a dividend so haven't been putting money away for CPP. My accountant said that if I wanted to contribute to CPP, we'd have to move to salary, which would mean a higher tax rate, I think it's around 6k or so more tax.
> 
> Do you think it's worth it to have CPP or better to go without and save the tax money and focus on investing elsewhere?


I'd say a mixture of both. As mentioned above CPP will be constant regardless of what the markets do but if the markets tank and you need the money for retirement, you may be in a tough situation. Lower taxes with corp div but in my opinion higher market risk. If you're solely taking dividends now a slight switch to salary might be ideal to get CPP. Higher taxes, yes, but guaranteed retirement income via CPP


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## uptoolate (Oct 9, 2011)

Higher taxes and you have to pay both the employer and employee portion of the CPP contributions. This adds to the drag. That said, I have done what others suggest and take enough salary to fund the CPP and get a decent RRSP contribution amount. Multiple buckets to draw from in retirement, RRSP, TFSA, CPP, OAS, retained corp earnings, non-reg savings (if any).


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## wendi1 (Oct 2, 2013)

My corp. pays me salary up to the max CPP contribution (a bit more than $50K). Any additional money I need comes out in dividends. That's one way to do it. You have to pay both parts of the contribution, but your CPP is inflation protected in the future. 

Another way is to take out salary until the RRSP contribution limit is reached (that's about twice as much salary, I think). No real advantage in going beyond that in salary.


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## richard (Jun 20, 2013)

If you take dividends you can do a little better than the CPP and about the same as an RRSP. You need to be a very disciplined investor and you lose creditor protection. My retirement plan is to start voting for the NDP in 2045


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## HomeChef (Jan 14, 2014)

I take all dividends as well and gave up CPP and RRSP room. I think it's a bit of a gamble betting on a CPP program that looks the way our current one does in 40-70 years from now (when I'll be collecting). I max out TFSAs and save the rest in the business.


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## Taraz (Nov 24, 2013)

wendi1 said:


> The feds are removing the tax advantage of paying yourself with dividends.


How so? Are they increasing the small business tax or increasing the dividend taxes?


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## Ihatetaxes (May 5, 2010)

The other reason to take a lower salary in Ontario is avoiding some of the EHT - Employer Health Tax. We pay 1.95% on all payroll over $400k (this has been increased to $450k for 2014). This is just another expensive drain on top of CPP and EI match for all of our employees. My partner and I taking dividends on a good chunk of our income helps save some of it.


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## marina628 (Dec 14, 2010)

We have taken mix of both since we started our business to max the CPP and give us RSP room.This year our personal CPP deduction and the biz share is $4851 x 2 a year and we have 13 years left before we are 60 years old.That is $126,000 in CPP and biz expense ,I have run the numbers but just investing that $9700 for next 13 year could give us a decent monthly income.


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## wendi1 (Oct 2, 2013)

http://wattsca.ca/blog/?tag=dividend-vs-salary

I assume you're a small business (like me).


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## ShannonC (Nov 16, 2012)

Thanks for the replies. Hmm, I didn't realize you could do both. I'm only taking 48k though personally out of my business for earnings (the rest staying in the business). This is more than enough for me to live on. So then if I took that as salary, I'd have nothing left to take as dividends if I understand right?

I just need to start planning something for retirement. Right now I have about 20k in stock investments, and a townhouse i'll be renting out that will have about +$1000 cash flow monthly and my primary residence at the moment is paid off. So now I need to decide where/how to invest the additional income I'm earning. i do like the idea of a guaranteed set amount from CPP. I was reading another article today though and I'm not sure I will have maxed my contributions (I'm 30 now and there's been a few years I didn't contribute and it seems you must contribute 40 out of 47 years you're able to?


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## wendi1 (Oct 2, 2013)

CPP is kind of complicated. There are exemptions for child-rearing, for instance. 

You can get your CPP summary at service canada http://www.servicecanada.gc.ca/eng/services/pensions/cpp/. You will have to apply for a password, if you don't have one already.

Most people don't max their contributions, but it's worth having even a little inflation-protected money in retirement, IMHO.


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## My Own Advisor (Sep 24, 2012)

I think it's essential to have inflation-protected money in retirement. Heck, I'd take some now in my working years!


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## RBull (Jan 20, 2013)

My Own Advisor said:


> *I think it's essential to have inflation-protected money in retirement*. Heck, I'd take some now in my working years!


I agree, and the more the better.


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## NorthKC (Apr 1, 2013)

It really boils down to your risk tolerance. Do you have the discipline to maintain your retirement portfolio? What happens if your business doesn't do so well for a period of years and you can't contribute much to your portfolio. CPP is a constant and the most recent report indicates that CPP is in a very, very stable position to the point that other countries are modeling their pension plan after ours. A hybrid of salary/dividends never hurts anyone but based on a lot of planning that I have done for some of my clients, salary begin to lose its effectiveness after you max out your CPP and you're generally better off with dividends after that point.


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## PerfectElement (May 22, 2013)

My Own Advisor said:


> I think it's essential to have inflation-protected money in retirement. Heck, I'd take some now in my working years!


Can't you get that from inflation-protected bonds?


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## Dogger1953 (Dec 14, 2012)

Shannon - Another consideration is the CPP disability pension. If you make sure that your salary portion is at least 10% of the YMPE each year (10% of $52,500 for 2014), you would ensure that you meet the contributory requirements for CPP disability, and you build yourself a small pension at the same time.


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## wendi1 (Oct 2, 2013)

Good point, Dogger. CPP disability is a small pension, but it might be needed someday.

PerfectElement - Inflation-protected bonds (real-return bonds, I assume we are talking about), oddly, have not been returning close to inflation lately. This is because they are affected by interest rates even more than they are by inflation.


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## HaroldCrump (Jun 10, 2009)

PerfectElement said:


> Can't you get that from inflation-protected bonds?


Depends on your definition of "inflation".
Inflation protected notes and bonds are linked to the official CPI.
So is CPP, and most defined benefit pensions (some are only indexed up to a % of the CPI).
However, in retirement, the CPI may or may not be reflective of _your _inflation.

IMHO, RRBs and other such products are completely useless to protect an individual (retiree or otherwise) against true cost of living increases.
They are, at best, meant for insurance companies, pension plans, and other institutions as long term hedges against mandated benefit increases indexed to the official CPI.


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