What is better for you: Salary or Dividend
Tax Rates 2023 – For Ontario Residents
February 26, 2023
Bare Trust
February 27, 2024
Options to Withdraw Funds:
The two most popular options to withdraw funds from the business are taking a business salary or dividends. A third option is to take a loan from the business; however, it is a temporary withdrawal as the loan is to be repaid. Below is a comparison of salary and dividends:
Comparison Table:
SALARY |
DIVIDEND |
|
Considered an expense for the company |
Not considered an expense for the company |
|
Source deductions from salary must be remitted to the CRA |
No tax is withheld and remitted to the CRA during the tax year |
|
Required to pay double CPP contribution (Employer & Employee). Exempt from EI contributions |
No contribution to CPP or EI contributions |
|
Will impact the RRSP deduction room |
Do not help build your RRSP contribution room |
|
Salary withdrawals are subject to personal income tax |
Tax rate is marginally lower than what is usually paid on salary |
| Considered personal income and can be used toward loan applications |
Considered Investment Income – dividends aren’t accepted when applying for a mortgage or other lines of non-business credit |
Factors to consider when selecting the best option:
- Lower income tax rate: Opting for no CPP contribution will result in a marginally lower tax rate for dividend payments. However, if you choose this option, you will have to decide how you save for retirement.
- Timing of tax bill: Receiving a salary will result in the regular payment of tax bills. Income tax will be withheld from every salary payment and remitted to the CRA. On the other hand, dividends may lead to surprise tax bills.
- Predictable income: A consistent income will make it easier to determine salary withdrawals. Dividends would be preferred in cases where income is not stable.
- Administrative issues: Source deductions from salaries must be remitted to the CRA on a monthly basis, and late payments may incur penalties.
- A hybrid of salary and dividends can be considered to benefit from both options.