Salary, dividends, or a combination of both?
Navigating the remuneration predicament as an incorporated professional or business owner
If you’re an incorporated professional or business owner, what is the best course of action when it comes to remuneration—salary, dividends, or a combination of both? The decision depends entirely on your personal preferences and circumstances, including your lifestyle and retirement goals. But to make the most educated decision, you should also consider the personal and corporate tax implications, among other issues.
That was the conundrum facing Linda, a dermatologist in the early stages of her career who heads up a busy and growing practice. Having recently incorporated, she considered whether to pay herself $150,000 in salary or $150,000 in dividends to fund her lifestyle expenses. It’s worth noting that Linda is a disciplined saver and isn’t necessarily looking to the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) or Old Age Security (OAS) as the sole source of income to fund her retirement. Here is a simple breakdown of the two main retirement funding options available to Linda as an incorporated professional:
- Taxed at the personal level at ordinary income tax rates
- Corporation can claim a tax deduction for salary paid
- Allows for contributions to CPP/QPP
- Allows for contributions to a Registered Retirement Savings Plan (RRSP), which are tax-deductible
- Allows for contributions to Individual Pension Plans (IPP)
- Taxed at the personal level at more favorable income tax rates than salary
- Not tax-deductible to the corporation
- No CPP/QPP contributions required
- Does not generate RRSP room
Notably, the choice of remuneration doesn’t necessarily have to be an either/or decision. Opting for a combination of salary and dividends may also be feasible, and business owners may also switch up the strategy as their circumstances change over time.
With the help of her tax professional and the guidance of her Richardson Wealth Investment Advisor, Linda determined that having higher immediate after-tax personal cash-flow at this time was more important, and that she did not need to accrue RRSP contribution room or CPP/QPP benefits for the year. Her corporation also did not need a tax deduction for a salary, based on its taxable income levels. Therefore, Linda opted for a dividend payment of $150,000 in order to fund her annual lifestyle expenses.
For a more detailed explanation of this topic, contact us to request a copy of our Education Library Article: Shareholder remuneration: Salary versus dividends.
As with any tax-planning strategy, every situation is different. Please contact our team for more information and to help you work with your tax professionals to determine the best salary / dividend mix applicable to your personal situation.