Dividend vs. Salary: Owner-Manager Compensation Strategy
ਡਿਵੀਡੈਂਡ ਬਨਾਮ ਤਨਖਾਹ: ਮਾਲਕ-ਪ੍ਰਬੰਧਕ ਮੁਆਵਜ਼ਾ ਰਣਨੀਤੀ
Strategic analysis of compensation methods for business owners, including tax implications and optimization.
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Key Takeaways
- Salary creates RRSP room, dividends are more tax-efficient
- Salary allows CPP contributions for retirement benefits
- Dividends avoid payroll taxes and administrative costs
- Optimal mix depends on personal circumstances
Salary Advantages
- Creates RRSP contribution room (18% of salary)
- Qualifies you for CPP retirement benefits
- Provides employment income for mortgage qualification
- Deductible expense for the corporation
Dividend Advantages
- No CPP/EI payroll taxes for corporation
- Lower combined tax rate in many cases
- Simpler administration—no payroll to run
- Flexible timing for tax planning
Integration Concept
Canada's tax system aims for "integration"—the idea that income earned through a corporation should be taxed similarly to income earned personally. In practice, there are differences that create planning opportunities.
Comparison at $100,000 income (Ontario):
All Salary: Higher payroll taxes, RRSP room created
All Dividends: Lower payroll cost, no RRSP room
Optimal: Often a combination works best
All Salary: Higher payroll taxes, RRSP room created
All Dividends: Lower payroll cost, no RRSP room
Optimal: Often a combination works best
Tax Punjabi Tip
Take enough salary to maximize RRSP room you'll use, then consider dividends for the rest.
Optimize Your Compensation
Tax Punjabi can model different scenarios to find your optimal salary/dividend mix.