Canadian FAQ #198 – Dividends vs Salary for 2016

Grant Gilmour

Is it better to take a dividend or salary for 2016?

Facts:

Owners and shareholders of a corporation have a choice to pay themselves either dividends or salary as part of their remuneration package.

The tax system in Canada is designed so that it should not matter how an individual earns their income as they should experience the same level of tax. However, the new changes to 2016 as part of the federal budget have increased the cost of dividends to the taxpayer.

Discussion:

When a corporation pays a salary to the shareholder it is an expense and there are corporate tax savings. The individual is then taxed on the personal tax return based on the tax bracket of their total income. Salaries require withholding taxes to be submitted regularly to Canada Revenue Agency (CRA), usually on a monthly basis. The employer is also responsible to pay an equal portion of CPP, and EI may be applicable as well to both the employer and employee(s).

In contrast, dividends do not attract any withholding taxes, but they generally do require quarterly personal tax installments if you are paying dividends regularly year to year. Dividends allow you more flexibility with regards to income splitting and tax planning. They can be paid to any shareholder at any particular time of the year as cash flow permits. Dividends can be paid to a family trust if it is a shareholder and then further split to its beneficiaries.

The tax rates on dividends for 2016 for BC residents has increased by almost 3% in comparison to 2015. This rate change has to be taken into account in addition to the factors listed above to help you make your decision. One other factor that may influence your decision to pay salaries instead of dividends is that salaries generate contribution room for RRSP’s.

Grant has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.

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