How do I decide between dividends and salary from my company?

This blog will discuss some of the typical decision making processes that you should consider when discussing with your accountant the most efficient form of receiving income from your company. Each situation will, of course be unique, and even the same individual may have different objectives from year to year which require careful consideration.

1) What is your cash requirement for your day to day living expenses? This will establish your minimum requirement from your company each year. It may be useful to establish a regular salary for the business owner to achieve this level and to make regular payroll remittances to CRA. This has the benefit of ensuring you are generating contribution room for your RRSP, accruing CPP credits towards your retirement, and evening out your cash flows which can be useful for budgeting purposes.

2) Consider paying your spouse. CRA will accept salary payments to family members that are reasonable, related to market rates and tied to actual services being delivered to the company. An employment contract can be useful in documenting these relationships and establishing the services being provided and related compensation. If documented carefully this can be an effective planning technique to split income with a lower income spouse or child.

3) Surplus cash in the company may be retained in the company and invested, paid as a dividend to the shareholders or claimed as a bonus by the shareholder/owner.

4) Dividends are a flexible way to pay out excess cash, keeping in mind they are generated from after-tax funds in the company, so some tax will already have been paid by the company.  If your spouse and family members are also shareholders in your company, or you have a family trust holding shares for their benefit, dividends can be “sprinkled” to them to take full advantage of their lower tax brackets.

5) If you don’t need the excess cash consider investing it in the company or establishing a holding company to pay the extra cash to as a dividend.  Investing within the company can generate an ongoing deferral of tax until the money is withdrawn although it will be necessary to pay out adequate dividend each to recapture the refundable tax that the company will have to pay on its investment income.

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Disclaimer

Information contained within this blog or on this website, either expressly or by reference, does not constitute professional advice and is designed strictly for general information purposes. As individual circumstances vary widely anyone seeking assistance with either their accounting or tax situation are strongly encouraged to seek appropriate professional advice.

2 thoughts on “How do I decide between dividends and salary from my company?

  1. James Gustafson Post author

    Hi Steve,

    Thanks for the question.

    Whether or not you have to pay your wife a dividend will depend on the share structure of your company. If, when the company was created, she was issued the same type and class of shares as you were then yes, she would also be required to receive the same per share dividend as you receive. However, when tax planning, usually a separate class of common shares is created for the spouse, ie. Class B common, and you, as the principal hold Class A common. Thus when you issue a dividend you can declare it only on your Class A common shares and there is no requirement to pay anything to your spouse. Hopefully this is how your company has been structured and then you should have no problem. If not, however, all is not lost as you can always do a corporate restructuring to issue different shares to your spouse, but this will entail quite a bit of paperwork and filings with the CRA and I would recommend professional assistance.

    The salary option can work if you declare a bonus to yourself, but you should consider the marginal tax bracket that both you and your wife are in as to how best allocate the income. The objective is to have both you and your wife paying tax at the same marginal rate, which is, in effect, perfect income splitting. By “marginal rate” I am referring to the overall rate of tax you face on the next dollar of income that you earn from your existing level which will vary by Province.

    I hope this helps.

  2. Steve

    Both my wife and I are shareholders in my company (inc). If I take out dividends, do I also need to pay my wife a dividend? (she already has a full time job making over $50K)

    If I do need to pay her a dividend, is it better to hold off and just pay me more “salary” from my company?

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