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Salary or Dividends?

12/02/2014


​As an incorporated physician, this is an important question for you to consider every year.

Our goal is to determine the best way to withdraw money from your professional corporation for your personal needs. There is no one ‘right answer’ but there is a best answer based on your unique circumstances.

For starters, tax rates may change from year to year, so the current preference toward salaries being less taxable may shift with the introduction of new tax rates. But tax rates are just one part of your decision.

Here are some other factors to consider:

• If a key element of your overall tax planning involves income splitting with other shareholders, the most common answer is: use dividends for part of all of your distribution. The opportunity to split income using salaries is limited.

• Consider the level of taxable income you are expecting to generate from your professional corporation each year. Salaries represent an expense for your corporation, which reduces your corporate taxable income. If drawing a salary in the current year creates a loss in the company that cannot be used, you are paying too much salary.

• Salaries carry an obligation to pay CPP premiums while dividends do not. Some people really dislike CPP and feel they could generate a better return investing the annual premiums themselves rather than relying on the government to administer this program. Others like the idea of creating a CPP retirement benefit. like the idea of creating a CPP retirement benefit.

• If your financial plan includes a focus on RRSP savings and you do not yet have sufficient RRSP funds set aside, you will want to pay yourself at least some salary. Salaries meet the definition of earned income under the Income Tax Act and therefore create future RRSP contribution room. Dividend income does not qualify as earned income and does not create future RRSP room. You also need to consider any unused contribution room.

• If you are using income splitting to assist with post-secondary education costs, you are likely using dividends. Understand that the student must claim the eligible tuition tax credits they have available before any dividend tax credits can be claimed. Plan to increase the dividends paid to the student to ensure that no part of the dividend tax credits are lost.

• As an incorporated professional, you can accumulate registered retirement funds and non-registered retirement capital within your corporation or holding company. At a certain point, RRSP / RRIF amounts may result in excessive annual retirement income, which is all taxed as regular income as it comes out of the registered funds.

Generally, dividends from your own company create more flexibility in timing and allocation of income among shareholders. A combined approach with a blend of dividends and salary offers maximum planning potential. The key is to make sure you are asking this question at least annually with an advisor who can help you look at the complete picture.

To learn more, contact Don Murdoch at 250.763.8919 or [email protected], or your local MNP Advisor.