As a business owner in Canada, one of the key decisions you need to make is how to pay yourself. There are two primary options available – taking a salary or receiving dividends. But which one is the right choice for you? In this blog post, we’ll explore the pros and cons of each payment method and help you decide.

Salary

A salary is a regular payment made by your company to you as an employee. It can be paid on a weekly, bi-weekly or monthly basis and is subject to source deductions for taxes, Canada Pension Plan (CPP) and Employment Insurance (EI).

Pros of taking a salary:

  1. Predictable income: With a salary, you can count on a regular, predictable income that can help you manage your finances better.
  2. Eligibility for EI: As an employee, you are eligible for EI benefits if you lose your job, get sick or need to take time off for other reasons. This can provide a safety net in times of need.
  3. Qualify for CPP benefits: By contributing to CPP through your salary, you can qualify for retirement, disability and survivor benefits.
  4. More straightforward accounting: A salary is easier to account for since it is subject to regular payroll deductions.

Cons of taking a salary:

  1. Higher tax burden: A salary is subject to higher income tax rates than dividends.
  2. No tax flexibility: There is no flexibility in terms of when you can pay taxes on your income since they are deducted at source.

Dividends

Dividends are payments made by your company to you as a shareholder. Unlike salaries, they are not subject to CPP and EI deductions.

Pros of receiving dividends:

  1. Lower tax burden: Dividends are taxed at a lower rate than salaries, which can result in significant tax savings.
  2. Tax flexibility: Dividends offer more flexibility in terms of when you pay taxes on your income since you have the option to defer the payment.

Cons of receiving dividends:

  1. Less predictable income: Dividends are paid out of the profits of your company, which can vary from year to year. This can make it harder to plan your finances.
  2. Ineligibility for EI: Since you are not an employee, you are not eligible for EI benefits.
  3. Limited CPP benefits: By not contributing to CPP through dividends, you may not qualify for the full range of benefits available.
  4. More complicated accounting: Dividends require more complex accounting since they are not subject to payroll deductions.

So, which payment method is right for you?

It ultimately depends on your personal circumstances and financial goals. If you prefer a more predictable income and are interested in EI and CPP benefits, a salary may be the better option for you. On the other hand, if you are looking for tax savings and flexibility, dividends may be the way to go.

At JTT Accounting, we can help you navigate this decision-making process and optimize your payment structure for maximum tax savings and financial success. Contact us today to learn more.