There is always a question when you start your own business whether you should withdraw salary and/or dividend out of the corporation. There are pros and cons for both salary and dividends, and we will go through them so you can decide which one is best for you and your corporation.
Pros and Cons of Withdrawing Salary Out of The Corporation
First, we will discuss the pros and cons of withdrawing salary out of the corporation. We will discuss how it will affect taxes, expenses, and cash flow.
Pros of taking out of the salary
- Salary is an expense for the corporation, this helps to reduce the corporation’s taxable income and reduces the corporate tax
- Salary helps you to better plan for retirement, which means the salary requires the contribution to CPP, which is one of the components in the retirement plan.
- The salary creates RRSP contribution room. RRSP is tax-deductible and helps to reduce individual taxes.
- Salary is required to utilize the personal income tax credits like child care expense and medical expenses
- If you withdraw the salary, the corporation will issue T4. For financing, mortgage companies or financial institution accepts T4 and help to qualify for mortgage/line of credit
Cons of taking out of the salary
- Salaries are taxed at the highest-level results in the higher tax.
- Payroll remittance is required every month, and at the end of the year, T4 will be issued to the employee. This will be regular and annual exercise and failure to do will result in stiff interest and penalty
- The employer has to contribute to the CPP and EI, this will be an expense to the corporation. However, it contributes to the reduction in the corporation cash flow. Effective 2019, the CPP cost is increasing and overall there will be a 20% increase in CPP over the 5 years.
Pros and Cons of Withdrawing Dividend Out of The Corporation
Next we will discuss the pros and cons of withdrawing dividend out of the corporation and the effects it has on taxes, income, and expenses.
Pros of taking dividend
- Dividends incur no payroll source deduction and No T4 annually
- Dividends are paid after corporate taxes. Therefore, dividend results in lower taxes on the individual tax return.
Cons of the dividend
- Dividends do not create RRSP room as it is considered as passive income instead of earned income
- Dividends do not create CPP as your future retirement income since no CPP contribution required
- Dividends do not utilize the personal tax credits such as childcare expenses
- Dividends should be reflected in the corporate minute books and your article of incorporation must allow the dividend to be paid out.
Conclusion
Salary or dividend depends on the owner’s preference, the goal for the future and how much money owners require in the short and long term.
One option may not fit all. Some situations may require you to consider a mix solution of salary and dividend. Versatile Accounting and Tax provide some help with those options before the year ends. Our Calgary CPA experts will provide the tax scenario of salary versus dividend to provide you with the best alternative. If you have any questions or would like to book an appointment, feel free to contact us
