Dividend vs Salary: Which is the Better Option in Canada? – Enterprise Podcast Network – EPN

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There are different ways to receive payments from corporations in Canada. You can choose to receive payment through Pay. Another option you can use is to pay yourself through dividends.

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If you are a corporation business owner, you may be confused about how to pay yourself. This guide will help you understand salary and dividend to make the best decision about dividend vs salary.

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What is a salary?

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Salaries are employment income that will become an expense for your corporation. This means you will receive a T4 for this payment method in Canada. You must report the earnings for personal income tax purposes.

The primary advantage of the salary is that it will reduce the company’s taxable earnings. You can pay yourself wages by registering your payroll account with the CRA. So every time you get your salary, some amount will be deducted from taxes.

What are dividends?

Dividends are paid to the shareholders of a company from the after tax income of the business. This means that these payments will not be recorded as expenses within the company. In this way the burden of corporate tax will not be reduced.

However, dividends are still preferable for many businesses because of the lower personal tax liability. The primary advantage is that your overall tax burden will come down. Every year a corporation is required to file a T5 for the individuals who received the dividends.

How are dividends paid?

Understanding how dividends are paid will help you more easily decide how to pay yourself. The corporation mainly declares dividends, and the money is transferred from the business account to the personal account of the shareholder.

In many companies, shareholders take money from a corporate account when needed. At the end of the calendar year, a dividend is declared for the total amount.

Remember that dividends are paid according to the shares held by the holder. This means that people holding more shares get more money through dividends. Meanwhile, salaries can be paid at a fixed rate.

Dividend Vs Salary: Which is the better option?

There is no definite answer between dividend vs salary for pay in Canada. The new rules have made it difficult to reduce the tax burden either way. Salary has a lower corporate tax rate but higher personal liability.

Meanwhile, dividends have higher corporate rates but lower personal taxes. Due to these differences, the total tax paid in both the options is more or less the same. That is why you should consider your personal preference when choosing a specific option.

conclusion

This was your complete guide to Dividend vs Salary. You can consider your individual needs to determine the right payment option. If you cannot decide on this, you can hire a consultant to assist you.

Taking help from a professional advisor will be useful as that person will provide you with the option that will benefit you the most financially and legally. Many accounting firms offer consultants for this purpose, so it is an excellent idea to contact them if you are confused.



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