Regan Exner

Salary vs Dividends: Which is Right for You?

Friday, December 09, 2011 by Regan Exner

 

Our personal and corporate income tax structure is as fair as it has ever been. It is what accountants refer to as being “fully integrated”. This means that at the end of the day, whether you pay yourself a salary or a dividend, when you take the income taxes paid at the corporate level and those paid personally, the combined taxes should be the same whether you take all salary, all dividends, or a combination of the two. That being said, nothing in life is perfect and, in almost all cases, there is a discrepancy of one or two percentage points that can work for you or against you and potentially influence your decision on how you compensate yourself.

Dividends

The Difference

Salaries are an expense to the company and thus all tax is borne by the individual on their personal tax return. Dividends are paid out of retained corporate income that has already been subject to corporate tax. When dividends are received by the shareholders and included on their personal income tax returns, they will receive a dividend tax credit essentially equal to the taxes already paid at the corporate level to prevent any “double-dipping” by the tax man.

Dividends are investment income – a return on your shares. As such, they are not subject to normal payroll deductions and charges such as CPP and EI premiums, provincial payroll/health taxes, workers’ compensation premiums, etc. They are also not subject to a withholding tax at source (although if you continually take all dividends, you will likely be subject to quarterly income tax installments as you can’t wait until you file your tax return each year to give the government their cut). Dividends are a very clean source of compensation in this regard.

The Benefits

As an added benefit, in many provinces dividends from income taxed at the lowest corporate tax rate results in an all out tax savings of a couple percentage points. When combined with the avoidance of the CPP premiums, the savings can quickly add up, significantly influencing many people’s compensation decision.

Another benefit to dividends is that unlike salary, they are an effective means of income splitting with family members who may own shares in the corporation directly, or indirectly through a family trust. Dividends are not subject to the same reasonability test as salaries are, which limits the amount you can pay family members to an amount similar to that which you would pay an arm’s length person for performing the same duties. Basically, dividends are a much more flexible and defendable vehicle for income splitting within the family. Caution that dividends should not be paid to children under the age of 18 to avoid the punitive “kiddie tax”.

Salary

The Difference

Salary, on the other hand, is subject to all of the deductions/charges mentioned above but does offer some benefits in terms of providing pensionable earnings for CPP purposes (if you interested in participating in the plan), generating RRSP/IPP deduction room (which dividends do not since they are investment income and not earned income) and qualifying for the basic non-refundable employment tax credit on your annual personal income tax return. Some form of salary also helps to justify non-taxable benefits provided to the owner-manager such as health and dental insurance coverage.

The Benefits

With salary comes the ability to contribute to an RRSP/IPP, and with those investment vehicles comes creditor protection, which may be more important to professionals and certain other business owners who have limited means of creditors proofing their assets.

A Word of Caution

One word of caution is that regardless of which compensation method or combination you choose, ensure your disability insurance coverage is not inadvertently impacted as a result of any change.

Some common compensation strategies we tend to see are:

  • Only dividends to inactive family members
  • Only dividends to owners who aren’t keen on paying into the CPP and are fine with using their operating company (or better yet, a holding company) to accumulate their retirement savings on a tax-deferred basis. In this case, I often recommend a nominal salary of at least $5,000 per year to qualify for the non-refundable employment tax credit on their annual personal income tax return as well as to provide a base level of disability insurance coverage through the nominal CPP premiums that will be triggered as a result.
  • Salary of at least $130,000 to the owner (often professionals) to maximize RRSP/IPP deduction room with any excess compensation requirements coming out in the form of dividends, often to an inactive spouse as well as to the professional.

Clearly, there is no one right answer in the salary vs. dividends debate, but speaking with your MNP Tax advisor will help confirm which strategy is right for you.

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Digging Deeper on Salary vs Dividends

Salary vs Dividends: A Brief Overview

Comments:

Monday, March 05, 2012 - 02:21PM GMT | BlueSafe
Hi there.. how often can you pay yourself a dividend if you decide to use dividends as the method to withdraw funds from your company? Thanks BlueSafe
Wednesday, March 07, 2012 - 11:30AM GMT | Regan Exner
Thanks for your query. Dividends can be declared/paid annually, quarterly, monthly or on a completely ad hoc basis. Directors are free to declare and pay dividends to the shareholders at their discretion as long as the company has sufficient equity at that point in time. Because a director's resolution is required to declare a dividend, they are often declared on a periodic basis (quarterly, annually, etc.) to clear previous advances made to the shareholder(s). Hope this helps, if you have any further questions please let me know.
Monday, June 18, 2012 - 08:52AM GMT | Sophie
Thank you for the helpful information. In your blog, you make a suggestion of paying a nominal salary of at $5000 to qualify for the non-refundable employment tax credit, as well as to provide a base level of disability insurance coverage. By doing so, would this require the setting up of a payroll account with CRA to transact the benefit payments?
Wednesday, June 20, 2012 - 11:58AM GMT | Regan Exner
You are correct. A payroll account needs to be set up with CRA in order to make the payroll remittances and file the annual T4 Return/slips. You can do this by calling CRA at 1-800-959-5525 or visiting their website http://www.cra-arc.gc.ca/menu-eng.html
Wednesday, June 20, 2012 - 11:58AM GMT | Regan Exner
You are correct. A payroll account needs to be set up with CRA in order to make the payroll remittances and file the annual T4 Return/slips. You can do this by calling CRA at 1-800-959-5525 or visiting their website http://www.cra-arc.gc.ca/menu-eng.html
Wednesday, August 01, 2012 - 02:01PM GMT | Anonymous
If I am Incorporated but work on a sub-contract type basis how should I be compensating myself. I prefer the dividend method, as I do not wish to contribute to CPP. Also, how should I be using my business income. Naturally, I will need to spend money on things that are not business related, such as dance classes for my daughter, or child care for my son. Which things should I pay for out of my business account and which things should I be paying for out my personal account? Thank you in advance.
Thursday, August 02, 2012 - 06:31PM GMT | Regan Exner
Before I get to answering your direct questions, I just want to ensure that you are aware of the personal services business ("PSB") rules and recent tax changes related to them. A PSB is essentially an incorporated employee. Where corporations normally offer tax advantages on active business income, a corporation's activities determined to be a PSB will have negative tax consequences in terms of higher corporate tax rates and significant limitations on deductible expenses. You referred to yourself as a "subcontractor" through your company. Every fact pattern is unique so I can't really comment on whether or not you could be considered a PSB but that consideration will likely impact your compensation strategy. If considered a PSB, bonusing the corporate taxable income to nil via salary is the most obvious strategy to avoid the possiblility of double tax. If there is no PSB risk, then a full dividend strategy will likely work just fine. All business expenses should be paid with corporate funds for ease of accounting. All personal expenses should be paid out of your personal bank account which would be funded by your shareholder advances/dividends. Hope this helps.
Thursday, October 18, 2012 - 11:15PM GMT | Anonymous
My husband and I are divorcing. His corporation funds our Family Trust which distributes dividends to our children and me. Once divorced, I really will not be a "family member" . As such, can I still receive dividends from the Family Trust as alimony ? Thank you in advance.
Tuesday, October 23, 2012 - 12:36PM GMT | Regan Exner
In this case, you will need to review the trust deed to see the definition of income/capital beneficiaries. If you are specifically named as a beneficiary of the trust via your actual name, your divorce would likely have no impact in this regard and you would continue to be a beneficiary of the trust. If you were included as a beneficiary of the trust through wording such as "spouse or common-law partner of John Smith" then upon your divorce you would no longer be a beneficiary of the trust. As this is more of a legal issue than a tax issue I would insist that you confirm the above with your legal counsel upon review of the actual trust deed. Once you confirm the above, that will answer your question on whether you may receive dividends in the future. Hopefully this helps.
Wednesday, October 31, 2012 - 10:46AM GMT | Anonymous
Thank you for the post. The information was very enlightening. I'm in a situation where I would be considered a PSB. Not knowing the new tax laws in regards to PSBs, I've been paying myself dividends in the last year (2012) up until now. Is there a strategy I can use to minimize my overall taxes payable for the year? Thank you for your advice.
Wednesday, October 31, 2012 - 08:23PM GMT | Regan Exner
No problem. If you are considered a PSB, the corporation will offer essentially negligible tax deferral and a higher combined corporate/personal rate of tax if you choose to continue to tax the profits in the company and then pay the residual out as a dividend to yourself/other shareholders - i.e. spouse. Not knowing your exact situation I can only generalize, but it is likely that you will look to paying all of the profits out in wages to yourself (and no one else). Any expenses incurred to earn the PSB income are likely better to be claimed on your personal tax return as expenses against the employment income earned from your company due to the tight restrictions on what expenses are deductible by a PSB. Essentially your corporation will act as a complete flow through with the net contract income all taxed on your personal tax return just as if you were an employee of the company you provide services to.
Friday, January 18, 2013 - 06:22PM GMT | Andy
Hello - I noticed that in one of the comments you mention that if considered to be a PSB, then bonusing the corporate taxable income to nil is a strategy. How exactly does that work? Do I still setup a payroll account with CRA, but declare a bonus payment instead of a salary payment? If I can avoid corporate taxes by bonusing down to nil (regardless if considered PSB), then wouldn't this be a better than paying myself a dividend? It's likely I am missing important details - like getting taxed heavier on my personal tax return? Can you please enlighten? Thank you in advance.
Saturday, January 19, 2013 - 09:49AM GMT | Regan Exner
You are correct, you will need a payroll account to properly pay a wage subject to payroll deductions from your company to yourself by the end of each taxation year to eliminate the taxable income in the corporation to avoid having the income subject to the punitive PSB tax rates. There is no difference between a wage/salary/bonus - all are deductible expenses to the corporation and taxable employment income to you. Key is that if your corporation is indeed considered a PSB, it is generally not advantageous to leave any profits behind in the corporation to be subject to the higher corporate tax rates and then later distribute as a dividend. End result will be that the combined taxes paid by you on the dividends and the company on the PSB income will be higher than if you had simply zeroed out the corporate profits via wage to yourself and paid all of the tax on that income personally. Keep in mind that all of the wages need to be paid out to you before the end of the corporation's taxation year to be deductible to the company in that year.
Thursday, March 28, 2013 - 07:19PM GMT | Mike
Just curious if I changed my mind though the year from payroll to dividends. I have paid into source and was wondering if I can get those funds moved from there to pay for my corporate taxes for the year?
Friday, March 29, 2013 - 08:51AM GMT | Regan Exner
The simple answer is no. By sending in the payroll remittances you have legally effected the wages so you can't really go back now and retroactively change this.
Thursday, April 04, 2013 - 12:24PM GMT | Deane Stockley
I'm presently receiving CPP disability. I would like to return to work but the income I can generate would only equal out to my disability payments. If I were to start a company to suppliment my income and only declare dividends or a combination of $5000.00 salary and the rest in dividends, would my CPP be stopped?
Thursday, April 04, 2013 - 02:57PM GMT | Regan Exner
That is a little out of my area of expertise as it is more of question of how the self-employment activities will impact your entitlement to the CPP disability benefits. I would consult with Service Canada on that first and then you can determine the compensation mix that makes sense for tax purposes.
Friday, June 21, 2013 - 12:00PM GMT | Anonymous
I currently work as a contracted employee for various production companies within the film industry as an 'individual' and am subject to the usual payroll deductions and am eligible for EI between contracts. However, I would like to open my own retail/service business within the next 12-18 months, and am considering incorporating now to offset expenses relating to research and purchases of material and equipment to manufacture prototypes. But, until I actually open my doors I will need to continue working in film, and if I do so through my company as a 'loan-out' rather than an as 'individual' can I assume that revenue would be construed as from a PSB, and therefore I should pay myself a salary? Also, can you tell me if a company can have a revenue stream from a source unrelated to the majority of its expenses?
Sunday, June 23, 2013 - 10:36PM GMT | Regan Exner
Hi, to answer your second question - yes, you can have as many different revenue streams as you like within the same corporation. In regards to your first question, determining whether or not you may be considered a PSB is too fact specific for me to make a determination with limited information. That being said, if you previously provided services to various companies via an employment relationship and try to now alter that to a contractor relationship but the services/conditions remain ultimately the same, it is likely that CRA would contend that you are indeed a PSB and you may have an uphill battle proving otherwise. If your new venture does not have significant liability risk, you may consider delaying incorporating to offset the start-up losses against your employment income.
Tuesday, September 03, 2013 - 08:38PM GMT | Jim
I own 45% of a company and get paid by salary and dividend split and it has worked well for me for the last couple of years but now I'm trying to get a new mortgage, its proving a nightmare. we have been trading for the last 17 years with year on year increase in profits. The mortgage company have asked for pretty much everything they can apart from my inside leg length. i have a perfect credit score. the mortgage company seem to think i cant afford it and are basing that on my salary not on dividend payments. any suggestions to how i can sort this out?
Wednesday, September 04, 2013 - 12:16PM GMT | Regan Exner
Sorry, I don't have a fix for you. My guess is that since you don't actually control the company (own more than 50% of the voting shares) and can't control when dividends are actually paid out, they are disregarding this as earned/recurring income for purposes of the mtge calculation. Other than trying to push for a higher wage in lieu of lower dividends, I'm not sure what your other options are.
Monday, October 07, 2013 - 07:48PM GMT | Anonymous
Is there a new rule in 2013 that we have to get salary as well apart from dividend. I used to get only dividend from my company so far. My accountant says that I need to take some minimum wages too.
Monday, October 07, 2013 - 08:55PM GMT | Regan Exner
Not that I am aware of. Your accountant may just have started doing this to take advantage of the non-refundable employment tax credit, for SR&ED purposes, have you pay into CPP, etc.?
Friday, November 08, 2013 - 12:11PM GMT | Anonymous
Great article and forum. I have 2 q's if you would be so kind to indulge me:)I am a contractor working in construction and have recently incorporated (1 man corporation). I would like to pay myself strictly through dividends due to no remittances and no CPP. I expect to make about 50-60k and distribute it all during the year. I do work mainly with one client, but do 'side jobs' as well at the same time. I would think PSB rules will not apply as I work on multiple jobs at the same time, use my own tools, market my services, and generally have control and have risk of profit/loss (on the side jobs for sure, may be hard to prove that with the main gig). My q's: (q1)i own a car which i use for business, am i eligible to personally charge my business for use of the car (based on the cra's prescribed per km rate) and receive that amount tax free as an allowance/reimbursement so to speak (entry being dr car expense CR S/H payable)? (q2)I would like to pay myself dividends. Can I pay myself dividends bi-weekly? Or would it be better to give myself shareholder advances on a bi-weekly basis and then quarterly issue myself dividends to payoff the shareholder loan? [with the latter strategy is there a risk of s.15(2)'s definition of 'series of loans and repayments' applying and me having to include the loan in my personal income?] THANKS
Friday, November 08, 2013 - 12:50PM GMT | Anonymous
Great article and forum. I have 2 q's if you would be so kind to indulge me:)I am a contractor working in construction and have recently incorporated (1 man corporation). I would like to pay myself strictly through dividends due to no remittances and no CPP. I expect to make about 50-60k and distribute it all during the year. I do work mainly with one client, but do 'side jobs' as well at the same time. I would think PSB rules will not apply as I work on multiple jobs at the same time, use my own tools, market my services, and generally have control and have risk of profit/loss (on the side jobs for sure, may be hard to prove that with the main gig). My q's: (q1)i own a car which i use for business, am i eligible to personally charge my business for use of the car (based on the cra's prescribed per km rate) and receive that amount tax free as an allowance/reimbursement so to speak (entry being dr car expense CR S/H payable)? (q2)I would like to pay myself dividends. Can I pay myself dividends bi-weekly? Or would it be better to give myself shareholder advances on a bi-weekly basis and then quarterly issue myself dividends to payoff the shareholder loan? [with the latter strategy is there a risk of s.15(2)'s definition of 'series of loans and repayments' applying and me having to include the loan in my personal income?] THANKS
Monday, November 11, 2013 - 11:34AM GMT | Regan Exner
Thanks. Yes, your company can personally pay you a reasonable per KM vehicle reimbursement that is deductible to the company and non-taxable to you. CRA provides the rates on its website that it considers reasonable on an annual basis. In regards to your second question, you would normally draw the funds out periodically however you like via shareholder advances and then prepare a director's resolution quarterly or annually to declare sufficient dividends to clear the advances. As long as the shareholder advances are all cleared at each taxation yearend of the company, CRA will generally not give you any hassle in respect of ss 15(2).
Sunday, November 17, 2013 - 12:13AM GMT | Pol
Great article. I have have a question in respect to PSB. I have a corporation and I was employed by intermediary (staff agency) to perform services to other (third) company. I am paid by intermediary. Am I considered as PSB?
Sunday, November 17, 2013 - 09:36AM GMT | Regan Exner
PSB determinations are very difficult to assess since they are so fact specific and anything but black and white. All I will say though is that you could be at risk of being deemed an employee of the intermediary and therefore a PSB in a situation like that.
Monday, November 18, 2013 - 12:45AM GMT | Pol
Thanks for your answer. I also have one more comment. There is also third option : management fee that is expense to the corporation and a revenue to a sole proprietor. What are advantages and disadvantages of paying yourself a management fee instead of for example salary?
Monday, November 18, 2013 - 07:30AM GMT | Regan Exner
There would be no benefit to a personal management fee over salary since they would be one in the same and should be properly shown as employment earnings and not self-employment earnings. The expenses you could deduct against both would be the same and would follow the employment expense guidelines.
Monday, November 18, 2013 - 01:30PM GMT | Anonymous
Does section 69 allows you not to have the issue of showing the "reasonability of amount" of salaries paid to the shareholders. Also, how can we use the EPSP effectively considering the recent changes.
Monday, November 18, 2013 - 11:42PM GMT | Regan Exner
Section 67 of the ITA requires that expenses must be reasonable to be deductible and this would include salaries paid to non-arm's length individuals. As for EPSPs, the recent changes have significantly restricted their benefit for the owner-manager so not much I can add here.
Monday, November 25, 2013 - 05:41AM GMT | Anonymous
Hey I formed a small company just incorporated a few months ago. I personally own all 100 percent of the company with no employees on payroll for now. I have a couple of contracts and money has started coming in. Can I withdraw the money from business to personal account and show it as dividend on a retroactive basis in my books later? Thanks
Monday, November 25, 2013 - 07:34AM GMT | Regan Exner
The simple answer is yes. The draws will be considered shareholder advances which you will then clear at/before yearend with a proper dividend resolution.
Thursday, November 28, 2013 - 04:14AM GMT | Anonymous
My spouse and I each own 50% of our company. I would like to take a salary, and he would like to be paid in dividends. Can this be done if we both have class A shares
Thursday, November 28, 2013 - 08:17AM GMT | Regan Exner
No, dividends are declared and paid on the entire class of shares proportionately. If you want flexibility on dividends going forward you would have to do a simple share exchange (Section 51 or 86 of the ITA) such that you would end up with say 50 Class A common shares and your spouse 50 Class B common shares.
Wednesday, December 04, 2013 - 06:03PM GMT | Anonymous
I would like to pay myself (clear out my shareholder loans account) by declaring a shareholder bonus of $5000 at year end and then taking the rest as a dividend. I understand the shareholder bonus would be payroll subject to CPP, EI etc. Question is, can I have this $5000 bonus be the only payroll I receive throughout the year? ie. can I declare the bonus without also paying/remitting source deductions throughout the year?
Wednesday, December 04, 2013 - 09:57PM GMT | Regan Exner
Simple answer is yes.
Thursday, December 12, 2013 - 06:29PM GMT | Anonymous
Hello, what a great and informative blog. I would really appreciate your advice. I registered my business as a corporation in 2013, so basically it is the first year. I wonder if I can pay dividends to myself and how often. My accountant says that I cannot pay dividends to myself till the end of the year and I will only be able to pay dividends on the second year and only once a year. I am confused now. Thanks!
Thursday, December 12, 2013 - 09:09PM GMT | Regan Exner
Thanks, you can pay dividends as often as you like but you must prepare the appropriate director's resolution to legally declare/effect a dividend. For administrative ease, you would normally draw the funds out of the company during the year and simply clear with a dividend resolution quarterly, annually, etc.
Monday, December 16, 2013 - 12:08PM GMT | Anonymous
Hi there, I relocated for work and paid all the moving expenses out of pocket - can the moving expense deduction be applied to dividend income?
Monday, December 16, 2013 - 06:28PM GMT | Regan Exner
No, you would need employment or self-employment income not investment income (which is what dividends are considered).
Friday, December 27, 2013 - 01:59PM GMT | Anonymous
Hi. I have noted the general concern about being regarded as a 'personal services business'. I will soon be starting a new consulting business where I will have a two year contract with a client that will provide approximately 90% of my business income (about $130,000/year revenue). I anticipate only having one or two other small contracts worth less than $20,000 per year. The only reason I would consider incorporating would be for dividend sprinkling with my children in four to five years from now. In this situation do you believe it may be more advisable to remain a sole-proprietorship in case CRA deems me a PSB a year or two down the road? Thanks for any advice you can provide.
Tuesday, December 31, 2013 - 09:23PM GMT | Regan Exner
That would make sense to me - to wait a few years until you can take advantage of the income splitting. Saves on professional fees and CRA audit risk assuming you are okay with not having the limited liability protection a corporation offers in the interim. Depending on the type of consulting this may not be a significant concern.
Saturday, January 18, 2014 - 01:58PM GMT | Anonymous
Great blog! I own 100% of a small incorporated company but for purposes of paying dividends on a special or ad hoc basis as circumstances warrant I have set up four classes of shares, one for each member of the family. First question; I want to declare/pay dividend re fiscal year 2012 earning (fy ending April 30, 2013)but for the dividend recipients to be able to include the dividends in their personal 2013 tax year filings. As we are now in January 2014, is this doable? Second question: can I declare/pay additional dividend from fy 2011 earnings but for the dividend recipients to be able to amend their personal 2012 tax filings?
Sunday, January 19, 2014 - 06:45PM GMT | Regan Exner
Thanks. Assuming the intent was there at that time, you may be able to record the dividends declared now in respect of the 2013 yearend by documenting in the Minute Book, preparing T5 slips, and reporting on the 2013 T1 and T2 tax returns. However, going back on the 2012 yearend would appear to be retro-active planning which is not allowed within corporate or tax law.
Monday, January 27, 2014 - 09:09PM GMT | Anonymous
Thanks for all this very informative information. I own an incorporated company in BC Canada and my accountant has alloted my income as dividends for the current year. My question to you is last year we did not have to pay WCB at all as in their words because I was being paid Shareholders Equity (for that year) these payments are non-assessable. Now that I am taking dividend income, is that assessable for WCB? Thanks in advance
Tuesday, January 28, 2014 - 07:38AM GMT | Regan Exner
Correct, dividends are investment income as opposed to employment income so are not subject to WCB.
Friday, January 31, 2014 - 10:15AM GMT | Anonymous
I am currently on CPP disability with a serious medical condition and therfore will have to desolve the small buisness that I own. My questions is once the assests and liabilities have been disposed of and if there is any money left over in the company can it be paid out as dividends without it being considered earned income which would affect CPP disability benifets as you are only allowed to earn $5200.00 in a tax year.
Friday, January 31, 2014 - 11:52AM GMT | Regan Exner
The dissolution of the company will have to come in the form of dividend income which is considered investment income and not earned income and should therefore not impact your CPP disability entitlement assuming it is coming from previous earnings and you are still unable to work. That being said, you may want to contact Service Canada directly and confirm this as it is not really a tax issue but more a CPP issue.
Wednesday, February 12, 2014 - 11:05PM GMT | Ronny
What is difference between director fee and dividend? I am the owner of the company 99 share As I know director fee - company do not need pay tax but I have to pay income tax for all. (Do I need pay CPP?) Dividend - company pay tax and I paid deferent between company tax and personal tax. My situation is Last year company Net income $48000 $34000 salary I want total incomes are $55000. It is too late to add salary now What you suggested? $20000 director fee or dividend?
Thursday, February 13, 2014 - 09:05PM GMT | Regan Exner
A director's fee is basically a wage subject to CPP premiums and income tax in your case. Sorry, I'm not in a position to be able to give that specific of advice not knowing your complete situation.
Saturday, February 15, 2014 - 07:10PM GMT | Cassandra
Hi my Husband and I own a small Incorporated company, we are the only two employees. Usually we both take a Director fee & a Salary that we pay CPP on. Also my Husband usually gets a Dividend, what I am wondering is if there is a minimum Dividend he can receive or claim? The lowest we have done to date was an actual amount of $8000. I want to know if we can claim lower? Thank you!
Sunday, February 16, 2014 - 10:59AM GMT | Regan Exner
If the shares you are paying the dividends on are regular common shares, no there normally wouldn't be a minimum dividend entitlement. However, if the shares are preferred shares there may be a minimum annual dividend payment - you'll have to check the Articles of Incorporation of the company to confirm in that case.
Sunday, February 16, 2014 - 11:34PM GMT | Ronny
my yealy end is End of July now . can I chage to end of Dec?
Monday, February 17, 2014 - 08:53AM GMT | Regan Exner
You can request a yearend change by writing CRA; however it must be done in advance so you are stuck with a July 31, 2014, although you may be approved for a December 31, 2014 yearend (as opposed to July 31, 2015).
Thursday, February 20, 2014 - 04:55PM GMT | Gina
Now that the dividend tax gross up for non eligible dividends has been reduced from 125% to 118%, does it still make sense to pay someone all dividends versus salary? Would the only real savings be not paying CPP/EI? Please advise if there is a new strategy. Thank you.
Thursday, February 20, 2014 - 04:57PM GMT | Gina
Also, if by paying yourself solely dividend with a rental property incurring a loss you trigger AMT. Is the only way to recover the AMT paid is to pay yourself a salary (thus paying CPP/EI).... Please advise. Thanks very much.
Saturday, February 22, 2014 - 10:03AM GMT | Regan Exner
That isn't the only way to recover AMT as any regularly taxed income such as wage, interest, rental income will work. If you are triggering AMT on your personal return, you may want to choose wages over dividends from your company to avoid.
Saturday, February 22, 2014 - 10:11AM GMT | Regan Exner
With the recent changes to the dividend tax rates it just means that the previous slight tax advantage in most provinces is now gone so the decision on whether to pay yourself salary vs. dividends will depend on all of the other factors discussed in the blog, with the main issue likely being that of whether you want to page a wage to create RRSP room and are okay triggering the resulting CPP premiums.
Tuesday, February 25, 2014 - 07:55AM GMT | Anonymous
thanks for great blogs (I read the follow up too). With the new changes, is there still an advantage if I am taking entirely dividends to my holdco, then splitting them as dividends evenly to myself and my spouse. She makes under $10G a year from other sources (T4), and I don't have any other sources. I imagine there is a tipping point for this, so as examples, where does it land with a total dividend (pre-split) of $72G? and what about $120G? or is it easy to define that line? Thank you.
Tuesday, February 25, 2014 - 10:12AM GMT | Regan Exner
There is an advantage to income splitting in almost every situation and at every income level, but having said that you'll want to watch certain things like medical expenses, child care expenses, etc. that are impacted by relative income levels between the spouses to make sure these deductions are maximized. The recent changes to the tax rates on dividends haven't lessened the advantage of income splitting with family members, they just took away the marginal tax advantage that existed if you chose dividends over salary (in most provinces).
Wednesday, February 26, 2014 - 12:44PM GMT | Anita Ali
Thanks a lot for answering everyone's questions. I also have a quick question. I incorporated in November and currently working as a contractor with the ministry. Will I be treated as a PSB. Second is that I am taking the dividend route and paying myself everything, but with that can I claim incorporation fee and professional membership fee on my return? Thirdly can I pay director's fee to myself and my parents as they are listed directors and claim that in my corporation return? Thanks for your help
Wednesday, February 26, 2014 - 01:15PM GMT | Regan Exner
You may very well be a PSB and you need to determine that first because if you are considered a PSB you will likely want to payout 100% of the income solely to yourself as a wage to avoid double tax. Your company's other deductible expenses are basically none as per the restriction in 18(1)(p) of the ITA.
Sunday, March 09, 2014 - 09:56AM GMT | cyril
Thanks for the great blog, if I own 100% of the shares of my company and I have been taking own money from the corporation during 2013, if I now want to class that as a salary and file the remittance to CRA, how do I go about it now that we are in march 2014
Sunday, March 09, 2014 - 03:43PM GMT | Regan Exner
You're likely too late as the payroll remittances would have been due no later than January 15, 2014 (assuming all wages were paid in December) and the T4 return/slip were due the end of February 2014.
Monday, March 10, 2014 - 10:25AM GMT | Cyril
Thanks, so what options do you think I have now? can I assume the money taken during 2013 as shareholder loan? and then declare a bonus in December 2013 and accrue the bonus in the 2013 books ( aim is not to have any money taxed in the corporation) and then pay the bonus in 2014? Also it is possible to use management fees ( as no remittance to be made) option and then take this to the personal income tax as business income. Thanks again
Monday, March 10, 2014 - 04:06PM GMT | Regan Exner
Avoiding payroll remittances and T4 slips via management fees from your operating company is not accepted by CRA. You can however declare a bonus effective December 2013 as you have said, and as long as it is paid - i.e. payroll remittances made within 180 days of the yearend (i.e prior to June 30, 2014) this will be deductible against the 2013 corporate profits and then taxed as employment income on your 2014 return. This would be used to clear out your shareholder advances which should technically be subject to a taxable benefit interest charge from the date of withdrawal but likely negligible here.
Monday, March 10, 2014 - 05:03PM GMT | Cyril
Thanks so much Regan, just to confirm that the 2013 shareholder advances can only be cleared when the bonus is paid in 2014.So there will be an amount due from shareholder in the 2013 financial statements. Also can the bonus be paid in installments in 2014? or it has to be just one lump sum? and how do I inform CRA that this is the bonus that was declared in December 2013? Thanks very much.
Monday, March 10, 2014 - 06:52PM GMT | Regan Exner
Correct, the shareholder loan would be outstanding over the yearend which is allowed essentially the first year. The bonus can be paid in installments although this would not be the norm and I would suggest a lump sum so as to not appear to be current, periodic salary/wage. The bonus should be properly accrued on the December 31, 2013 financial statements and tax return as a liability and it is advisable to mention the bonus declaration in a director's resolution within the Minute Book as well.
Monday, March 31, 2014 - 01:40PM GMT | Anonymous
Very informative blog...My question is when I file my Ineligible dividend from my company, I fill the T2SCH3 (line 450/460) and then somehow the TurboTax suggested me to also file T2SCH53 and T2SCH55 as well. I might be wrong it seemed both these two SCHs are for Eligible dividends rather than Ineligible dividends. Am I right ? Thanks
Monday, March 31, 2014 - 11:44PM GMT | Regan Exner
You are correct, those schedules are just to track GRIP/eligible dividends.
Tuesday, April 22, 2014 - 01:17PM GMT | Marik
Hello Regan, thank you for your explanations. Could you please clarify my situation? I have incorporated business and own 100% shares. It is a consulting business and I was placed with the company through an agency. The business was active in 2013 fiscal year only until the very beginning of February. My accountant did not issue T4 slip but declared consulting fees as Business Net Income in my personal return (Form T2125). My accountant stands that I did not have salary and have to provide nil remittance and cancel payroll. CRA in turn requests me to issue T4 (even though the deadline passed) and refuses to cancel payroll. Is it appropriate not to get T slip to indicate this income or not?
Tuesday, April 22, 2014 - 02:43PM GMT | Regan Exner
CRA is correct - the consulting fees taken from your company are employment income and not self-employment income and are therefore subject to the standard payroll remittance requirements, T4s, etc. Your accountant just did a shortcut which CRA doesn't allow.
Friday, May 09, 2014 - 12:47PM GMT | Anonymous
Hello Regan, I have a question regarding dividends that I did not see an answer to in any of the posts above.... If my corporations' year end is December 31st, but my books were not completed until April the following year, can I still issue a dividend? I realize that T5s must be submitted by February 28th, but I wonder if I still can issue a dividend without issuing a T5? I think I have seen on one of the schedules a line where you can enter dividend received without having a T-slip... Would CRA object to the fact that a slip was not issued? Thank you in advance for your help :-)
Saturday, May 10, 2014 - 03:49PM GMT | Regan Exner
You have to be careful to not be backdating/retroactive tax planning. A dividend must be declared by the directors via a resolution and can't technically be done retroactively. However, in cases where you simply want to clear the debit balance in your shareholder loan account prior to yearend being December 31st, it is fairly common practice to finalize the resolution and the T5 slip prior to the end of February when the T5 slip is due, although the dividend is declared effective December 31st. All dividends must have a T5 slip prepared to avoid penalties.
Sunday, May 11, 2014 - 08:36PM GMT | Anonymous
Hi there. I just started my own contracting company. I have very little in personal expenses such as rent, cell, car insurance. My company has very few as well. My top priority right now is saving for a home. What method of paying myself would you recommend? Salary, dividend or a combination of the two? I'm saving quite a bit right now but come the end of the year I want as much of that income as I can to use as a down payment with paying as little tax as possible. As well the dividend tax credit is something I'm trying to process, could I use it in my favour for my situation Thank yiu
Monday, May 12, 2014 - 08:01AM GMT | Regan Exner
The differences now are pretty much negligible between salary and dividends in most provinces given recent federal budget changes. Our tax system is almost perfectly integrated such that whether you take salary or dividends, the combined tax between what you pay and what the company pays will be the same under either scenario. In your case it sounds like you want to draw out all of the funds personally now so there likely is little advantage one way or the other assuming you don't have a lower income family member you can split income with via dividends. The dividend tax credit simply allows the income to be taxed at a lower rate personally giving credit to the corporate taxes already paid.
Monday, May 12, 2014 - 04:19PM GMT | rwhitten
Hi there, I have a contract with a financial institutions as a Sr. Learning Consultant. I received the contract on the condition that incorporate. In your opinion would I be considered a PSB? Where can I find out more details about the a fore mentioned restriction on deductible expenses?
Monday, May 12, 2014 - 05:57PM GMT | Regan Exner
You are definitely at risk of being considered a PSB but impossible to tell without all of the facts. However, I would assume yes, unless you had definitive evidence proving a legitimate business and not simply that you are an incorporated employee/contractor. See ITA 18(1)(p) for the deductible expense limitations.
Monday, May 12, 2014 - 08:46PM GMT | Anonymous
Hi, Are there situations where a professional corporation may not be required to withold income tax and other deductions on bonus paid to the director who is a professional and does not have an employee status with the corporation? Thanks.
Monday, May 12, 2014 - 11:44PM GMT | Regan Exner
No, since a "bonus" would be considered employment income.
Tuesday, May 13, 2014 - 09:34PM GMT | Anonymous
I just got incorporated few days ago as I'm doing an independent contracting. I put both me & my spouse as directors on the 'article of incorporated' and also declared the same at CRA. I will be doing the consulting work and my spouse will help on the office admin work. Do I declare as both salaried employee? or I can be salaried & dividends and my spouse will just get dividends? At the end of the year, what is the minimum money should be left for the company? How can we get the most of money in the company? Thanks for all your help! Your blog is so informative and helpful.
Wednesday, May 14, 2014 - 11:25PM GMT | Regan Exner
If you and your spouse have separate classes of common shares then you can declare dividends to the exclusion of one another. Wages must be reasonable based on the work performed so your spouse's wage will likely be far less than yours if you go that route. No minimum needs to be left in the company, just pull out what you need personally and any left behind in the corporation will benefit from tax deferral.
Tuesday, June 03, 2014 - 02:31PM GMT | Anonymous
Hi there...very happy I came upon your site as my husband and I are in the process of trying to figure out what route to take, salary or dividend or both...and needless to say we are a bit stumped? The corporation is my husband's (plumbing company) whereas he subcontracts from a few different companies. So they pay the corporation, which then will pay hubby. I can pretty much guarantee that all the money the corporation makes we will need for our mortgage, bills, etc. (as this is our only source of income), therefore what are your thoughts on being paid via a salary vs via dividend. Is there any penalties should there be minimal funds left in the corporation at tax time? Reading through, it doesn't seem like one is better than the other (salary vs dividend) however how does one decide what is best for them? Also, if dividend is the way to go, can we withdraw semi-monthly (at same time corporation gets paid from contractors)? Sorry for all the question and thank you in advance!!
Tuesday, June 03, 2014 - 03:46PM GMT | Regan Exner
Sorry, I can't really advise definitively one way or the other without knowing all of the facts and your objectives. The dividend option is often preferred though since you simply draw the funds out as you need them and then clear these draws by periodically declaring dividends via the corporate Minute Book/director's resolutions. This avoids monthly payroll remittance requirements (although at some point you may have to make quarterly personal income tax installments). If you do pay salaries, you'll have to make sure they are reasonable for the amount of work performed in your case assuming it is your spouse who does the majority of the work.
Wednesday, June 04, 2014 - 11:04AM GMT | Jeremy
I have set up a small business in Alberta early last year - Feb. 2013. It paid out dividends (about $40000) to me in 2013 tax year (1/1/2013 - 31/12/2013). Where in the corporate tax return should I put this amount? Grateful if you could kindly advise. Lots of thanks in advance.
Thursday, June 05, 2014 - 11:10AM GMT | Regan Exner
Schedule 3 is the place to record dividends paid and received.
Thursday, June 05, 2014 - 02:39PM GMT | Anonymous
My husband has had a consulting business for the last twenty years (Incorporated) He is 80 years old now and there is minor income from interest on loans. The retained earnings on the books are basically equal to the loans outstanding. The loans are being paid back now (slowly). We are looking to close the company. What is the most tax beneficial way to get the income (from repayment of the loans)? I know a T4 he would have to pay tax on the whole amount, where if I issue a T5 (if I can) then it is not totally taxable.
Sunday, June 08, 2014 - 11:40AM GMT | Regan Exner
You would dividend out the retained earnings/loans over time and report the amounts on annual T5 slips.
Wednesday, June 18, 2014 - 08:36AM GMT | End_User
I'm incorporated and use a room in my 2-bedroom condo as a home office (I work about 50% of the time at home and 50% of the time at client sites). My accountant has suggested that instead of taking the personal deductions for the mortgage and other home expenses, I should simply set up a rental agreement of a modest amount between me and my corporation -- and have the company pay 'rent' as an expense. Recognizing that I would then personally have to declare rental income, I'm wondering if this is worthwhile. It would certainly simplify accounting at the end of the year. But is it legitimate/allowed, and if so, any 'gotchas' I should keep in mind?
Saturday, June 21, 2014 - 09:08PM GMT | Regan Exner
For simplicity purposes, I would normally just deduct a portion of the home operating costs inside the company via your shareholder loan account as opposed to the rental approach as you have suggested - should get you to the same spot in the end with less hassle.
Wednesday, July 02, 2014 - 12:54PM GMT | Maureen Kaprawy
Hi, I am basically retired but still have about 80,000 in retained earnings from when I was actively working. Should I declare a dividend (or series of dividends ) over the next couple of years to get them out? If so-is there any other paperwork required besides the directors resolution? I am filing my own T2 as there is no activity in the corp and its been very straightforward the last 5 years because of the inactivity..
Wednesday, July 02, 2014 - 01:55PM GMT | Regan Exner
Sounds like a good plan. You will also have to complete T5 slips annually reporting the dividends to be declared on your personal tax returns.
Sunday, July 06, 2014 - 09:02PM GMT | Robin
Hi,I incorporated recently, but didn't set up a bank account for the corporation, all revenue from customers for the corporation have been deposited in personal bank account and I have been using it for personal expenses. The accountant is not happy with it, is there a way to fix it, and would I have problems with CRA?
Friday, July 11, 2014 - 10:04PM GMT | Regan Exner
Your accountant is correct. A company is a separate legal entity so unless you treat it as such and flow the funds properly through the company's bank account you will have CRA issues. My advice, get things switched over asap.
Monday, July 21, 2014 - 12:35PM GMT | Michael
Thank you for the insight, it was a good article. I do have a question which may be too difficult to answer via this form. I'll try my best to articulate it here. I have been divorced for a several years and am no longer paying spousal support. I have two children that I am paying support for (16 & 12) approximately $2k/mth. I want to emphasize that I want the children to continue receiving the same support on an ongoing basis as my priority. I am considering moving from full time employment to contract but want to minimize the taxes that I'm paying and it sounds/reads like dividends is the most effective method. Do you have any recommendations or feedback?
Tuesday, July 22, 2014 - 10:30AM GMT | Regan Exner
Although dividend sprinkling with adult children may be beneficial in some cases, every situation is unique and you must be careful not to "waste" their tuition/education deduction in lieu of the dividend tax credit. That being said, if you are employed and looking to do the same work for the same company via contract with the goal of incorporating and income splitting with your adult children via dividends this will not work since your company will likely be considered a personal services business ("PSB") increasing the effective tax rate on your corporate consulting income + personal dividends to more than the tax rate you are currently paying as an employee. Bottom line is your options may be very limited.
Thursday, July 24, 2014 - 12:52PM GMT | Maureen Kaprawy
Further to my question on July 2, 2014 about declaring the dividend to get it out of retained earnings-do I have to include any other schedules in the T2 package or do I just put it on line 3700 of the GIFI? I looked at the Schedule 3 , but it didn't seem correct because I didn't think I would qualify for a dividend refund. I did make up a shareholders resolution to declare the dividend-do I include a copy of that with the T2? thanks, Maureen
Thursday, July 24, 2014 - 01:56PM GMT | Regan Exner
Yes, you do need to properly complete Schedule 3 to report all dividends paid (and received). CRA does not need a copy of the resolution.
Sunday, July 27, 2014 - 08:28AM GMT | Anonymous
Hi, I own an incorporated consulting company and I understand in order for meals to be deductible they must have been incurred to earn business income.While doing my consulting assignment, is the cost of my lunch a deductible expense?
Sunday, July 27, 2014 - 02:47PM GMT | Regan Exner
Possibly, if incurred while entertaining clients, travelling for work, etc. but not for a typical, solo lunch break.
Tuesday, August 26, 2014 - 08:02AM GMT | Parviz
Hi, Thanks for the blog. My accountant completed my income tax report for 2013 and declared all of my company earnings as dividend. Now we are doing my company taxes and it turns out that the dividend option does not work in my cases i.e I pay in totality 25% more in taxes. Can I go back to my personal income tax and change dividends to salary. Please take note that company taxes for 2013 have not been filed yet. Thanks for your help.
Tuesday, August 26, 2014 - 04:07PM GMT | Regan Exner
That would likely be considered retroactive tax planning in your situation which is not allowed.
Sunday, September 07, 2014 - 01:19AM GMT | Rana SMA
Hi, I want to know that My accountant declare Dividend 75% of my total earnings from my Corporation (T2) Income and he issued T5 to CRA and He also showed the 75% dividend to my Personal Income Tax (T1) as an Income. However, He didnot minus the 75% dividend from Corporation Tax, so I paid Tax as per his calculation (as he didnot deduct the Dividend money from T2). Even when he showed up the Dividend income to my T1, I paid tax on the Dividend Income (75% of total income e.g. 75,000 Tax paid $16k) my question is it the correct way of paying tax twice on the Dividend ? Any suggestion will be helpful?
Sunday, September 07, 2014 - 01:08PM GMT | Regan Exner
This is correct. Dividends are paid out of after-tax profits of the corporation and not deductible. When included in income on your personal return they are eligible for a dividend tax credit which reduces the tax you pay on them on your personal return by the same amount of tax already paid via the corporation. This ensures no double taxation and is known as "integration".
Wednesday, September 24, 2014 - 09:58AM GMT | Kingshurst
As a small incorporated business I understand I need to have a payroll account with CRA and take the required deductions from any salary I pay. I am the owner of the company and the only full time employee. If I pay myself a salary do I need to deduct EI and remit this as well. It is my understanding that I would not be able to claim EI.
Wednesday, September 24, 2014 - 02:36PM GMT | Regan Exner
If you own more than 40% of the shares, your income is not insurable so no requirement to deduct EI.
Monday, September 29, 2014 - 06:26PM GMT | Anonymous
Hello I am 100% shareholder and paying myself a salary. In the event If I join other company as full time employee what should I do with payroll account? How should I stop paying salary from my company? Thank you in advance for the advice.
Tuesday, September 30, 2014 - 08:13AM GMT | Regan Exner
You can simply call CRA and cancel/suspend your payroll account. Future withdrawals from the company should be in the form of dividends to avoid having to pay into CPP twice.
Wednesday, October 01, 2014 - 10:19AM GMT | Anonymous
If a corporation makes advances to a shareholder how long can the advances remain on the balance sheet before they have to be paid back by the shareholder, or taken as income by way of dividends or salary?
Friday, October 03, 2014 - 11:02PM GMT | Regan Exner
By the end of the subsequent taxation year of the corporation for the first instance and annually thereafter.
Wednesday, October 08, 2014 - 09:04AM GMT | Anonymous
Hello Regan, I incorporated only few days ago. I want my adult son, who works for me, to be a minority shareholder. What’s the best way to decide on a percentage of ownership for him? I intend to pay myself dividends only but cannot decide about paying my son. Could I pay him dividends only as well? Is it possible for a corporation to exist without a single employee? Thank you in advance!
Thursday, October 09, 2014 - 08:30AM GMT | Regan Exner
Correct, there is no requirement for a corporation to have employees per se, but it must have directors/officers although there is no requirement that they be compensated. It is up to you on how you want to incorporate your son as a shareholder as you'll need to consider if you want him to have voting powers and to what degree, and what percentage of the income and growth you want to share with him. Your lawyer can advise on this although I would suggest you likely want to give him a separate class of shares from the ones you will hold to allow for discretionary dividends to be paid amongst yourselves going forward.
Thursday, October 23, 2014 - 08:32AM GMT | Anonymous
I have owned a small business for 5 years, but only a few weeks ago I incorporated. My accountant says that I cannot pay dividends to myself during my first year of being incorporated, because I do not have retained earnings. Is this correct?

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