SALARY OR DIVIDEND ?
BY : JILL STAIRS , PARTNER , EPR DAYE KELLY & ASSOCIATES
Salary Or Dividend ?
What Should You Choose ?
Whether to draw a salary or a dividend is a challenging matter for incorporated business owners . A fundamental concept in Canadian income tax is that there should be no significant difference in total income taxes paid , regardless of form — salary or dividends . This preserves integration of the income tax system and prevents the occurrence of a rate arbitrage which could otherwise skew an owner ’ s decision . Generally , incorporated business owners have a choice about the form of their compensation : take a salary as an employee or a dividend as a shareholder . Given the recent changes in tax rates , both federally and in New Brunswick , it is worthwhile for business owners to revisit their compensation model if they have not done so in a number of years .
In 2016 , the income tax rates in New Brunswick reflect that there is no cost of incorporation on corporate earnings in excess of $ 500,000 . However , the owner has to ensure distributions are designated as eligible dividends to receive this result . For corporate earnings subject to the small-business tax rate , there is a 1.6 percent cost to incorporation . Keeping active business earnings within the corporation ( i . e ., taking no salary or dividend ) results in a significant deferral of personal income taxes : 39.3 percent for corporate earnings under $ 500,000 and 24.3 percent for corporate earnings in excess of $ 500,000 .
Taking a salary means contributing to the Canada Pension Plan ( CPP ) as both an employer and an employee , with a cost of around $ 5,000 a year to obtain maximum CPP benefits in retirement . Furthermore , salary generates contribution room for Registered Retirement Savings Plan ( RRSP ) purposes . In contrast , a shareholder opting to just receive dividends preserves cash by avoiding the CPP contribution . Where no employment income is earned , no RRSP room is generated and lower CPP benefits will be received in retirement compared to someone who contributes to CPP throughout his or her employment . In 2016 , to receive maximum CPP benefits , an employee needs to earn a salary of $ 54,900 . To maximise RRSP contribution room , a $ 144,944 salary is required . These amounts increase annually because of indexation . These are some , but not all , of the considerations for choosing one form of compensation over the other .
Typically , owners can use shares of the corporation that legally owns the family business as a way to provide for additional flexibility in their family compensation strategy . For an individual with a spouse and adult children , providing share ownership to them allows for dividends to be sprinkled to persons in lower tax brackets , achieving family income splitting . The end result is often a reduction in the overall effective tax rate for the household which ultimately maximizes family wealth .
There are a number of legal , tax and other considerations to factor in when developing a compensation plan . It is important to work with knowledgeable advisors to ensure a strategy is in place , it is revisited frequently and it continues to be current to meet the owner ’ s objectives . +
Jill Stairs is a partner with EPR Daye Kelly & Associates in Fredericton , New Brunswick .
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