Salary vs Dividends Canada Best Way to Pay Yourself From A Corporation In Canada

Salary or dividend. As a business owner should pay yourself a dividend or a salary. I will share the two most common ways that how business owners like to pay themselves and what are the pros and cons between them. So make sure you stick to the end.

Salary vs Dividends Canada  Best Way to Pay Yourself From A Corporation In Canada

Salary vs Dividends Canada Best Way to Pay 

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So enjoy what I have. And let's get started. One of the biggest questions business owners ask is, what are the best ways to pay themself if they own the business? Now we have a couple options. The first common way is through a salary. The second is through dividends, and the third is through a shareholder alone.

I will only focus on the two first, and as always, make sure you talk to your accountant to decide which way is the best. First, let's talk about how the structure works. You are the key employee of your companies. You have to do certain tasks to drive the business forward, and therefore your company hires you and pay you a salary, and therefore your salary is a hundred percent taxable at your personal income tax. 

And it's also a hundred percent in a company's expense. Now, what if I take it out as a dividend? Because you're the shareholder of your. And usually in small business, you're the only shareholder in the company. Therefore, when company makes money and is profitable, the company can pay shareholder a bonus. 

Know that this bonus is not an expense, so business cannot write it off as a after tax corporate money, then pay it to the shareholder. So let me show you more numbers in details. Say Peter is a chiropractor and he's the only shareholder in his business. Let's say he makes $500,000 in revenue and spend $300,000 in overhead expense. 

Best Way to Pay Yourself From A Corporation In Canada

Now, Peter needs a hundred thousand dollars after tax income for his own personal stuff. Let's see how the math. Breaks down. So in order for Peter to take a hundred thousand dollars nets in salary, that means he needs to have 146,000 before tax, which he can pay his cpp, which is 3,500 and his federal and provincial income tax. 

So that's $146,000 from his company. Plus his company also needs to spare out of 3,500 with employers side of the c. That means 500,000 minus $300,000 overhead expenses minus $150,000 for P side. The leftover will be the profit, which is $50,000. This $50,000 will be then tax at nine to 12% small business tax, depending on which profits you will end, let's say 10%. 

So $5,000 goes to the cra, so the total amount of tax in this transaction will be $5,000 small business tax and around $42,000 in personal income tax, plus 7,000 of cpp, which is around 54,000. Now, let's see what happens. If this transaction is declared as dividend, then like I mentioned before, dividend is a bonus to shareholder, so it doesn't count as. 

Therefore, the company have $500,000 revenue minus the $300,000 overhead expense, which is $200,000 profit. The company needs to pay the small business tax on the $200,000 first, which is 20,000. Then we have the leftover $180,000 and the company will pay Peter $126,000 in order for Peter to have a hundred thousand dollars after tax money. 

This is a rough estimate because it, depending on which province you are in, and dividend tax is another monster topic to chat in the future. Therefore, the total amount of tax will be $20,000 from the small business tax plus $26,000 from a dividend tax, which is around 46,000 as you can. The amount of tax of both ways is very similar.

 The main difference is on the CBP payments because C wants to make sure people to pay in fair, and like I always say, C is always the smartest person in the room and they always win. Okay, so if doesn't matter for tax purpose, then what is the difference? Let's first look at the ways that most people know how to pay themselves, and that's through a salary. 

Everybody is familiar with this payment method, as is the most. The biggest benefit of a salary is that you get a steady, predictable income throughout the year. This is especially important if you're personally looking to borrow money for a bank, for a mortgage or a loan. The other is that when it comes to tax time, you don't have to pay a huge tax bill as you make installment payments throughout the year. 

The third big benefits of paying yourself in a salary is that you create r s P room for yourself. This helps you shelter some of that income from taxes and give you savings for your retirement while you can use this to offset your personal income. Paying yourself a salary also means that you have to pay into the Canada Pension Plan, which is deductive from every paycheck. 

This can be seen as both a benefits or a drawback as you don't get that money right away, but you do get that C P P benefits when you retire. The last consideration is withdrawing a salary, thus reduce the overall financial results of your company, which can. Its ability to retain financing or company loan.

How To Pay Yourself As A Business Owner

In other words, you could take a salary of $10,000 for every month, then a bankman look at it as a liability and decide not to land company money, which can hammer the growth. Next, let's look at the second way to pay yourself, which is giving yourself dividends. The biggest advantage is it's the simplest way of getting money out of your corporation and to you personally. 

If you pay a salary, we need to set a account with a c. Set up the pay source deduction and remittance every month and complete T4 forms at the end of the year, and the salary needs to be reasonable. For example, you cannot hire a janitor and pay him $200,000 per year, and when you put someone in a payroll, save $50,000. 

You have to pay $50,000 by the end of the year. However, dividends are pale based on share. Ultimately here is no monthly administration you need to worry about. So it can be simpler and technically you can pay yourself any time, any amount you want, and by the end of the year, all you have to do is to file a T five form. 

Now they all sounds great, but one of the big thing to consider with dividend payment is you are not paying income tax every month like payroll. So when it comes to tax time, you might have a very large tax bill that you may or may not have. Can't. If you can plan and put away that money, that may not be a big deal, but more than a few business owners have been caught off guard by the amount taxes they own the government by the end of the year. 

Paying yourself through dividends also provides the greatest flexibility when the company is doing well. You can pay up more dividend and when it's doing poorly, you can keep money within the company. This is a great benefit, especially if your company is only one or two years old and hasn't built up steady cash flow yet, or you are in the industry that fluctuates season from season. 

Another reason why like dividend is you can add your spouse as shareholder as well too. That way you have two shareholders to give dividend to you. You don't have to pay two times the CBP and payroll fees. Next, you don't have to pay into the CBP with dividend payments. As we stated earlier, this can't be a negative. 

Or a positive, that's roughly $7,000 per year. If you invest that money wisely, you can end up having more money for your retirement plan than if you pay into the cbp. However, if you spend all your money, you'll run into money problems in your golden years. It all comes down to how discipline you are with your investing. 

How to Pay Yourself as a Business Owner 

One problem with dividend payment bill is you won't create any r s. So you don't have that tax shelter for your retirement. However, there are other ways you can shelter money from taxes, and if you're interested in knowing more, feel free to talk to us for more options. Next, paying dividend doesn't count as a business expense, so it could be preferable when viewed by lenders. 

Investor or potential bias, but again, here you want to consider your own onboarding needs. The best way to do is look at your goals for the next five years. So after hearing all those info, which way should go forward? Yeah. A couple questions you can ask yourself. First, what kind of industry are you in? 

Do you get paid regularly? Oh, there's a big fluctuation in month to month for your business. What are your financial goals in the next two years? Are you looking for tax optimization or are you looking for big personal purchase? How much do you need as personal expense and how often we need it? 

Therefore, remember to always talk to your accountant before deciding whether paying yourself a salary, dividends, or a combination of the two is best for you and your company. They can help you through the process and answer any questions you might have if you're interested in a free consultation to learn how you can build tax free. 

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