Ask the Accounting Expert – Jennifer Nadeau
There are two ways to extract funds from a corporation, either pay a dividend or receive a wage. The payment of dividends comes from after-tax corporate profits whereas wages are a deductible expense to the company. Both are taxed differently in the hands of the individual. Now which one is the better way to be paid? It all depends on what you are after. One of the benefits of taking dividends is saving on CPP premiums (4.95% for each employee & employer). Paying dividends also allows you to split income with other family members provided they hold shares in the company. And there is no restriction on the amount of dividends that can be paid unlike salaries that must be kept within a reasonable amount when paid to family.
Taking dividends might sound good, but paying a wage also has its benefits. For instance salary income is considered earned income, which generates RRSP deduction room. Salaries also provide pensionable earnings and if you are counting on someday collecting CPP during retirement you will want to pay yourself at least some wages.
With the new dividend tax credit that came in to effect in 2014 the combined amount of tax paid corporately and personally are nearly identical regardless of which method you choose. Paying a combination of both dividends and wages is a great way to get the best of both options.
Give me a call at 403-504-5565 or visit my website at www.jennadeayca.com