When businesses are successful, the owners will want to pay themselves for all of their hard work. For these owner-managers of incorporated businesses, they can choose between salary and dividends. Choosing the right form of remuneration is not solely a tax decision. While the overall tax cost is often similar, there are several important factors that should be considered.

• Salary – Advantages

1. Slight Tax Advantage- In many situations, salary can be marginally more tax-efficient than dividends, with potential savings of approximately 0.05% to 1.82%, depending on the income level.
2. Canada Pension Plan (CPP) Benefits- Salary contributes to CPP, which can provide retirement, disability, and survivor benefits. While CPP contributions increase current cash outflow, the pension you ultimately receive is based on your highest earning years, making salary beneficial for individuals who expect to have a strong earnings history over their working career and is especially beneficial to those who are not actively saving for retirement.
3. RRSP Contribution Room- Salary is considered earned income and generates RRSP contribution room. Contributing to RRSPs help in saving for retirement and provide tax deductions in the year of contribution, allowing for tax planning annually. Dividends do not create RRSP room, which can limit future tax-deferred retirement savings opportunities.
4. Access to Government Programs and Benefits- Many government programs and benefits are based on earned income. Historically, programs such as COVID-19 relief benefits, and various wage-based incentives have generally relied on employment income rather than dividend income.
5. Taxes Are Remitted Throughout the Year- Payroll withholdings for income tax, CPP, and EI are remitted by the corporation, reducing the likelihood of personal tax instalment requirements and helping avoid large surprise tax balances at year-end.
6. Child Care Expense Deduction- Child care expenses are generally deductible by the lower-income spouse, provided that spouse has sufficient earned income. Since salary is considered earned income and dividends are not, paying salary to the lower-income spouse may help families incurring significant childcare costs with a tax deduction.
7. SR&ED Tax Credits- For innovative companies who access the Scientific Research & Experimental Development (SR&ED) and corresponding provincial tax credits or grants, salaries to owner/managers potentially allow access to these funds whereas it is not available to those who take dividends. 

• Dividend – Advantages

1. No CPP Contributions Required- Dividends are not subject to CPP contributions. For owner-managers already at the CPP maximum, avoiding both the employee and employer portions can save approximately $8,000+ annually in cash outflow, making dividends attractive for businesses with limited cash flow or for those who will plan to save for retirement in other ways.
2. Improved Cash Flow for New Businesses- Since there are no CPP, EI, or payroll withholding requirements, dividends can preserve cash during the early stages of a business when cash flow may be tight.
3. Reduced Administrative Burden- Dividends do not require ongoing payroll processing or monthly payroll remittances. This can be beneficial for business owners who prefer a simpler administrative process. Penalties and interest on late remittances can be crippling to those with low cash flow.
4. Greater Flexibility- Dividends can generally be declared based on the shareholder's needs and the corporation's available retained earnings. There is no requirement to establish a regular payroll schedule, making dividends easier to customize throughout the year (e.g. cyclical businesses).
5. Simpler for Less Organized Record-Keeping- For business owners who do not maintain regular payroll processes, dividends can be easier to implement since they do not require ongoing payroll calculations and remittances.

If you have any questions or would like a more detailed plan of action on whether salary or dividends would be more beneficial in your specific circumstance, please contact our office at (780) 448-0399. We will be happy to assist you.