There are various ways of receiving payment from a corporation in Canada. You can choose to get paid through a salary. Another option you may use is paying yourself through dividends.
If you own a corporation business, you may be confused about how to pay yourself. This guide will allow you to understand salary and dividends for making the best decision about dividends vs salary.
What Is A Salary?
A salary is an employment income that will become an expense of your corporation. This means that you will get a T4 for this payment method in Canada. You must report the earnings for personal income tax purposes.
The primary benefit of a salary is that it will reduce the company’s taxable earnings. You can pay yourself a wage by registering your payroll account with the CRA. So each time you get your salary, some amount will be deducted from taxes.
What Are Dividends?
Shareholders of a company are paid dividends after the tax income of the business. This means that these payments will not be recorded as an expense within the company. The burden of corporate taxes will not be reduced because of this method.
However, dividends are still preferable for many businesses because of their lower personal tax liability. The primary benefit is that your overall tax burden will decrease. Every year a corporation has to file T5s for those individuals who received dividends.
How Are Dividends Paid?
Understanding how dividends are paid will help you decide easily how to pay yourself. The corporation mainly declares a dividend, and money is transferred from the business account to the personal account of a shareholder.
In many companies, shareholders take money from the corporate account whenever required. At the end of the calendar year, a dividend is declared for the total amount.
Remember that dividends are paid according to the shares of the holder. This means people holding more shares get more money through dividends. Meanwhile, salaries can be paid at a fixed rate.
Dividends Vs Salary: Which Option Is Better?
There is no fixed answer between dividends vs salary for payment in Canada. New rules have made it difficult to reduce the tax burden through both methods. Salaries have a lower corporate tax rate but a greater personal liability.
Meanwhile, dividends have a greater corporate rate but lower personal taxes. The overall tax paid in both options is more or less the same due to these differences. This is why you should consider your personal preference when choosing a specific option.
Conclusion
This was your complete guide about dividends vs salary. You can consider your personal needs to determine the correct payment option. If you cannot decide about this, you can hire a consultant to help you.
Seeking help from a professional advisor will be useful because the person will offer the option that will benefit you the most financially and legally. Many accounting firms offer advisors for this purpose, so contacting them is an excellent idea if you’re confused.
