You work so hard to make your business a success and like anyone else, deserve to get paid. As an owner of an incorporated business, you have a couple of options to choose from as your compensation - salary or dividends.
What is a salary?
Regular payments made to yourself through the corporation. You will require a payroll account (through CRA) as well as making all the necessary remittances such as CPP and income tax.
Pros of salary
1) Getting a regular paycheque allows you to make contributions to your RRSP
2) Easier to apply for loans as you will have ongoing income (weekly/bi-weekly pay-stubs)
3) Salary is a deduction to the corporation, therefore overall decreasing your business' tax liability
4) Unless you had another source of income throughout the year, you will probably have little to no tax owed at the end of the year as all mandatory remittances would have been taken care on an ongoing basis, therefore reducing the unknown and increase certainty
Cons of salary
1) Salary is fully taxable (every pay-cycle)
2) Account needs to be properly setup with CRA
3) There is little to no tax planning you can do under this payment method
What are dividends?
Payments declared after year-end to the business owners. The total is decided on based on the net profit (after-tax) and can vary every year as it depends on the business' performance.
Pros of dividends
1) Tax deferral. Dividends can be declared at year-end, but paid out in the following year. The amount will be taxed on the year the cash was actually paid. For example: dividends were declared in 2019 but paid out in 2020. As a business owner, you will include this as your income when filing your 2020 tax return hence deferring the tax on this amount by at least a few months
2) No payroll account is required
3) Can be paid to a shareholder that is not necessarily an employee
4) Amount is not subject to CPP hence less deductions
Cons of dividends
1) Dividends do not allow you to make any RRSP contributions as they do not count as 'income'
2) On the same basis of 'no income', as a business owner, you will have less personal tax deductions available
3) Total tax owed on the amount varies from year to year and the bill might be high and come as a surprise
Overall, the decision on the right way to go varies from business to business and from owner to owner. There is no one solution that fits all and a proper analysis needs to be done to take all the relevant aspects into considerations such as: future planning and goals (from a business and personal perspective), cash-flow, presentation of financial situation, etc.
To get additional assistance and proper tax planning, schedule a consultation today.