# Small business with over 500k in profits .. salary or dividends?



## andr545 (Nov 1, 2017)

Hi,


I own a corporation with over 500k in profits

I am not originally from Canada and will not be retiring here. 

We might sell the business with the next 5 years.


My wife (also a shareholder) and I usually take out roughly 70k each in dividends each year.

We have maximized our TFSA accounts (money is in high interest savings 2.1%)

We have not received any salary or made any RRSP contributions.


Just wondering if receiving dividends from the corp is our best option since our company is making more then 500k profits?


Thanks


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## redsgomarching (Mar 6, 2016)

With dividends - the tax credit helps you minimize your tax burden however as you have learned dividends do not increase your RRSP contribution therefore limiting some tax deferred gains. 

now i have to ask another question i thought of - is this 500k profits based on a net income for tax purposes calculation? because if you are that point where you are earning 500k in profits you can always payout a "salary" or "bonus" to lower your taxable income to ensure you qualify for the SBD.


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## Jimmy (May 19, 2017)

Based on your situation, salary looks to be the best.

*Rates for ON*

Personal tax rate on $70K : 29.6 %
Div tax rate on $70 K: 6.39%
Small bus tax rate 18% (income up to $500k)
Regular bus tax rate 26%


*On business income of < $500k* 

for $70k of income, pay it as a *salary*. You then pay personal tax of 29%, $ 20,300 in personal tax. But you save the business $70K x 18% = $12,600 in tax. Try and pay salary to reduce income to $500K if possible too.
*Net tax is $7,700.*

If you pay the bus tax then pay yourself a *div* the total tax is (18% + 6.39%) x 70K 
*Total Tax is = $17,000.*

*On business income of >$500k* 

Now the rate on bus tax is even higher so salary again.

https://www.taxtips.ca/taxrates/on.htm
https://www.taxtips.ca/glossary/smallbusinessdeduction.htm
https://www.taxtips.ca/smallbusiness/corporatetax/corporate-tax-rates-2018.htm


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## andr545 (Nov 1, 2017)

Thanks *Jimmy* and *reds* for your feedback.

I and the company are based in BC.


Do the following calcs make sense:


*Rates for BC*

_Personal tax rate on $70K :_ 23.52% _ includes cpp+ ei _ (simpletax.ca /calculator)
_Personal ineligible div tax rate on $70 K:_ 10% (simpletax.ca /calculator)
_Small bus tax rate (profit up to $500k) :_ 13% (taxtips.ca /smallbusiness/corporatetax/corporate-tax-rates-2017.htm)
_Regular bus tax rate :_ 26%



*On business profits of < $500k *


_Income paid as salary :_
Business Expense Deduction : 70k x 13% = ($9,100)
Personal Tax of : 70k x 23.52% = 16,464

= Net Tax Paid : $7,364

_Income paid as dividend :_ 
Business Expense Deduction : 0 = ($0)
Personal Tax of : 70k x 10% = 7,000

= Net Tax Paid : $7,000


_Winner :_ dividend payment by $536 _(if not interested in RRSP payments and income tax deductions)_




*On business profits of > $500k (even after salary deduction) *


_Income paid as salary :_
Business Expense Deduction : 70k x 26% = ($18,200)
Personal Tax of : 70k x 23.52% = 16,464

= Net Tax Paid : $1,736

_Income paid as dividend :_ 
Business Expense Deduction : 0 = ($0)
Personal Tax of : 70k x 10% = 7,000

= Net Tax Paid : $7,000


_Winner :_ Salary payment by $5,264 



Are the figures correct? Can there really be that much of a tax benefit to taking salary if the company profits are above 500k?

Is there some sort of tax credit where you can claim back some of the additional tax paid if paid in dividends?


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## Eclectic12 (Oct 20, 2010)

Where one takes a salary ... I seem to recall one has to contribute both the employer and employee CPP contributions, so factor that in as well.


Cheers


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## domelight (Oct 12, 2012)

oops


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## domelight (Oct 12, 2012)

andr545 said:


> Thanks *Jimmy* and *reds* for your feedback.
> 
> I and the company are based in BC.
> 
> ...


Facts
1. BC Corprate Tax Rate over 500K = 26% (Profits over 500K x 72% = the ability to pay an eligable dividend)
Therefore to pay 140,000 eligable dividend you need to have paid corporate tax on 695,000 in profit
2. BC Corporate tax rate under 500K = 13% assuming CCPC Taxed Profits at this level = non eligable dividend
Eligable dividends are more tax attractive to the personal tax return than non-eligable

3. assuming the 70,000 each in dividends are eligable, than in BC you would pay roughly 6,500 (3,250 each)
4. 70,000 in wage each results in the following.
Corp Saves 36,400 (140,000 x 26%)
Corp Saves 1,333 (5,128 x 26%) This is the cpp which the corp owes on the wage (EI not applicable if you own 40% of the controlling shares)
Corp Remits 10,256 This is the total canada pension you will remit on both of your wages
Personal Tax 26,436 (Your personal taxes will be 13,218 each)

Total difference is 5,459 cheaper to pay a wage.

CONSIDERATIONS:
-your actually paying 15,715 less in tax your just contributing 10,256 in CPP (At least you get something back from this eventually)
-paying dividends your personal cash flow is 133,500 (140,000 less tax of 6,500)
-Paying a wage your personal cash flow is 108,436 (140,000 less tax of 26,436 less cpp of 5,128)
-if your paying partial non-eligable dividends the benefit is reduced Note.. CRA is consistently reducing the credit for non eligable dividends year over year.
-if your paying non eligable dividends your most likely better off with a wage
-You need to pay an accountant to run some scenarios specific to you. as things and situations change. I guess over 5k in savings warrants 3-5 hundred bucks extra to a good accountant to run the optimal scenario. Looks like a sound investment to me.


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