Dividends or Business Income: Which Do I Claim?

Some business owners must decide whether to compensate themselves with a salary or dividends. If you own a business, you need to decide what you want to do with any profits from your business before the end of the tax year. If you take a salary, you’ll be taxed on your employment income. If you receive dividends, you need to include the gross-up amount on your tax return, where you’ll receive a credit to offset the higher taxes.

As a business owner, you need to decide whether to take a salary or dividends.

Salary Compensation

Salary is tax-deductible to a corporation and taxable to an employee, much like if you work for someone else. With the recent increase in provincial tax rates, careful consideration needs to be made as to whether it makes sense to pay yourself via salary or dividends. When your company pays you a salary, it issues you a T4 slip, which you must claim on your tax return. Your company also can claim a tax deduction for the salary paid.

Things to Consider

Before deciding whether you’d prefer to be paid in salary or dividends, there are several things to consider. The factors are always changing, so this is a decision you should consider revisiting every tax year. “Paying salary generates RRSP room that dividends do not,” says Jason Heath, a certified financial planner at Objective Financial Partners, Inc. in Toronto. “Paying dividends avoids Canada Pension Plan and Employment Insurances contributions, unlike salary. Certain expenses can’t be deducted against dividend income, only salary. So there are lots of considerations when determining the best salary or dividend mix for an individual.”

References:

• Jason Heath, certified financial planner; Objective Financial Partners, Inc.; Toronto, Ontario
• Canada Revenue Agency: Line 120 – Taxable Amount of Dividends (Eligible and Other Than Eligible) from Taxable Canadian Corporations