Disclaimer: this is not financial advice, and is provided as general information only.
One of the most important decisions you will make as a business owner is how you’ll pay yourself.
Depending on your business background, you may think a salary is your only option.
However, dividends may give you an economic advantage.
Each business has its own considerations, both in financial structure and tax implications.
Here at Business Minding Services, we’re a CPA firm in Markham, ON.
We can guide you in making the right choice for you and your company.
Understanding the basics of dividends and salaries will give you a starting point to consider which one is best for your situation.
In this article, we’re taking a closer look at pay.
- How do I pay myself as a business owner in Canada?
- What is the most tax efficient way to pay yourself?
- And is it better to pay yourself a salary or dividends in Canada?
Keep reading to find out.
What Is A Dividend?
When a corporation has after-tax earnings, a portion may be distributed to shareholders.
These portions are called dividends.
If you hold any stocks as investments, you may be familiar with this already.
Shareholders may include you as the owner of the company, along with your board of directors.
Shareholders generally receive dividends based on the number of shares they own.
For example, a dividend of $5.00 per share would pay $100.00 to someone who owns 20 shares.
If you are the sole shareholder and dividend recipient as owner of your company, you can set your own payment terms.
This system of remuneration may look very attractive, but it has both advantages and disadvantages for business owners.
RELATED ARTICLE: Ways to Structure Your Business in Ontario, Part 3: Incorporation
Why Do People Pay Themselves Dividends?
As a method of corporate profit distribution, dividends offer businesses more flexibility, and may be more economical.
Their main benefit is you don’t need to deduct taxes or CPP at the source.
Dividends are also not part of the company’s payroll, and therefore can be paid out at your convenience.
While this may sound great, there are drawbacks to consider and weigh against the option of paying yourself a salary instead.
What Are The Disadvantages Of Paying Dividends?
As an individual, not having taxes, CPP, or RRSPs deducted at source means you must plan carefully to cover these yourself.
Some business owners find themselves trapped in a loop of taking dividends to pay personal taxes, which then impacts taxes the following year.
Dividends also incur a higher corporate tax rate, which may affect your business as well.
With these drawbacks, a salary may look increasingly attractive.
What Does Salary Mean In Canada?
Your heart and soul may be in your business, it is a separate entity from you in a legal sense.
This gives you the option to have your corporation pay you a regular salary for services rendered, just like your employees.
While a salary doesn’t give you the freedom to pay yourself at any time, being on payroll has many advantages.
What Are The Benefits Of Salary?
For you as an individual, a salaried income can take care of tax and retirement planning since personal tax and CPP are deducted at source.
There is also room to contribute to an RRSP.
A salary gives you access to certain personal tax deductions, such as medical and childcare expenses.
Your business can also deduct your salary from its taxable income and has a lower corporate tax rate than dividends.
These benefits can be substantial, especially if you have a young family and are concerned about saving for retirement.
However, there are also drawbacks to going the traditional salaried route.
What Are The Cons Of Going On Salary
Depending on the amount of income you receive from your company, you may be subject to a higher personal tax rate.
The money you receive must be paid out according to the payroll schedule, with the up front corporate deductions for CPP and taxes.
This results in a more complex process, especially if the business is on the smaller side, with a limited payroll structure in place.
It also does not give you the freedom to take money from the company on an as needed basis.
Weighing all the benefits for salary or dividends may not be as straightforward as you would like.
It helps to look at your own financial profile, instead of the tax rules, which can seem abstract on their own.
Which Option Is Best?
The right choice is highly dependent on your circumstances.
These can include everything from your business’ profit margin, to whether you have children or other dependants, or are nearing retirement.
The best way to understand the intricacies of this decision is to look at a couple of examples:
First, let’s consider a successful interior designer in London Ontario that has a high corporate income.
The company has a dedicated bookkeeper to help her business stay on top of payroll and accounting tasks.
In her personal life, the company owner is excited to start trying for a second child next year, and her family is considering moving to a bigger house.
In this case, she would benefit from taking a salary.
Her business’ income is high, which means paying her a salary and annual bonus would reduce her corporate income tax rate.
She also has payroll processes already up and running, which makes adding her as an employee relatively easy.
Personally, a salary would allow her to claim childcare expenses and help her qualify for a new mortgage.
A salary works well for her, but that’s not the case for every situation.
Let’s consider another scenario – this person’s name is Andrew.
Andrew is in his early 60s and decided to begin a new digital marketing and SEO agency in Toronto to share his wealth of knowledge.
He is in a good position to start fresh as he has paid off his mortgage and has his retirement funds in order.
Andrew’s business has seen some fast success, and he has a couple of employees working for him as well as several contractors.
As the sole owner of his company, Andrew is still sorting out his payroll and spends his evenings looking over his accounts.
In this example, Andrew is not looking to qualify for financing in the near future.
Nor is he concerned with the sort of personal tax benefits that are an important consideration for others.
Andrew spends his time with his clients and is a bit overwhelmed with the accounting side of his business.
He may be at risk for missed or late source deductions, which would result in hefty penalties.
In his case, as the sole owner of his company, choosing the simplified process of paying himself with dividends makes sense.
His corporate profits are lower than the business limit and he is less concerned about tax benefits and retirement planning.
The freedom to pay himself as he needs the funds is a significant advantage at this point in his career.
If your situation falls more into the grey area than either of these examples, or you’re otherwise not sure which to choose, it’s a good idea to get some expert advice.
Book Your Consultation With Business Minding Services Today
Each business is as individual as its owner, or owners.
Choosing between paying yourself with salary or dividends is not a one-size-fits-all decision — it depends on your unique financial situation, business structure, and long-term goals.
While salaries provide stability, tax deductions, and retirement planning benefits, dividends can offer flexibility and simplicity, especially for certain business owners.
Both options come with trade-offs that must be weighed carefully to avoid costly mistakes.
That’s why personalized guidance is so valuable when it comes to making the right choice.
At Business Minding Services, our expert team of accountants are available to assist business owners navigate these decisions with confidence and clarity.
Book your consultation with Business Minding Services today to find the most tax-efficient and practical strategy for paying yourself.
