Paying Yourself: Salaries vs. Dividends – Part Two

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Paying Yourself Salaries vs. Dividends Part Two
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• The Pros and Cons of Salaries
• Todays blog is the second of a two part series
  on paying yourself as a Small Business Owner
  should you pay yourself a salary or in dividends?
• In part one of this two-part blog, I examined the
  benefits and drawbacks of compensating yourself
  with a salary this second analysis will provide
  a breakdown of dividends. Click here to read part
  one!
• So what are the ins-and-outs when, as a small
  business owner, you decide to pay yourself via
  dividend? Here are some of the pros

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• Its simple when you need money, just write
  yourself a cheque. There are no source
  deductions to make and no reports to send to the
  government.
• Lowest tax in the short term with dividends, you
  do not pay into the Canadian Pension Plan (CPP).
  CPP contributions in 2017 are 2,564 for the
  employee and an additional 2,564 matched by your
  employer (i.e. your company), so your annual tax
  savings here is 5,128a nice little weekend get
  away!
• Depending on how you think about CPP, this can be
  a good thing or a bad thing. Generally speaking,
  if you dont pay into the CPP program, you dont
  get any pay outs once you retire.

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• Some folks think that CPP wont be around when
  they retire in 30 years, so they dont want to
  pay into it. Our opinion is that CPP is here to
  stay and provides a good safety net if your
  business unexpectedly fails. Paying 5,128 per
  year into an investment portfolio for 45 years
  (the average working life of a person) and then
  being entitled to receive roughly 1,200 per
  month until you pass away is a very reasonable
  return on your investment. Are you sure that you
  can do better than this investing the money
  yourself? Not paying CCP premiums is the primary
  reason that the tax rate differs between salaries
  and dividends. When CPP is ignored, the tax rate
  is nearly equivalent between salaries vs.
  dividends.

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• You can pay inactive persons income splitting is
  a powerful tax management strategy. Currently,
  you can pay shareholders (i.e. your spouse, your
  brother, anyone that owns shares in your company)
  a dividend even if they dont provide any
  services to your company. This allows you to
  direct income to lower income earning people and
  save a significant amount of tax. Note, our
  liberal government is currently working to end
  this benefit.
• Flexibility we can easily change how much income
  we declare to you by having you repay any excess
  monies you withdrew from the company. This can
  be helpful to manage your income tax rate in any
  given year.

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• There is always a downside. Here are some of the
  cons associated with dividends
• Surprise tax bills depending on how much you
  withdraw from the company, you may have a tax
  bill the following April. Your taxes could be as
  little as 0 or as high as 50it all depends on
  how much you withdraw. MAKE SURE you talk with a
  qualified accountant before withdrawing more than
  50,000 from your business. Clients and
  accountants both hate surprise tax bills.
• RRSPs you will not have access to the RRSP
  program. RRSPs are super importantin our
  opinion they are one of the best tax deductions
  available. We wrote a whole blog just on them for
  that reason (read it here).

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• Higher tax rate in the long term generally
  speaking, you will end up paying more tax in the
  long run if you utilize dividends consistently
  over your lifetime, primarily due to the RRSP
  component described above. Please note that this
  depends on your personal tax circumstances and is
  not a universal truth.
• Summing it all up, we generally take a mixed
  approach to the salary vs. dividend question.
  This way we get the benefits from both salaries
  and dividends, while minimizing the downside.
  While we would love to give you some specific
  instructions here, the right answer for you
  really depends on how much money youre going to
  need over the long term from your business.

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• Are you wondering what the best combination is
  for you? We offer everyone a free hour to discuss
  any questions that you may have. Contact us here.
• Kent Accounting is a full service accounting firm
  located in Calgary, Alberta. The firm is lead by
  Kent Greaves, a Chartered Professional Accountant
  in Calgary with over 18 years of experience
  working with privately owned companies. Our small
  business accountants in Calgary believe in
  prompt, accurate service at affordable rates.
  Running a small business can be the most exciting
  endeavor and the greatest challenge a person can
  undertake were here to help you succeed.