Should You Take Salary or Dividends as a Small Business Owner?

Salary or dividends?

As a new or small business owner naturally if your Company is doing well you want to reap the benefits of some of the profits.   Your first inclination just may be to draw a salary from the business funds when it is able to support this or you have need of it.   You may be wondering the best way to do this as a tax advantage so you are trying to determine should you take it as a salary, or should you withdraw your payment as dividends.

You not only have to consider your present financial situation when taking remuneration for yourself but you need to think about your future.   As a business owner chances are that you are now not building up funds for your future by way of a pension.   This could mean you are not building up the amount that you are allowed to contribute to your RRSP. I  f you withdraw money for yourself by way of a salary then you are addressing this problem.   While this is a simple explanation there is a lot to be considered.   Drawing money out as a salary means you will have to pay tax on this at a personal level at the prescribed rate.

If you pay yourself by way of dividends then this is a different story as the tax rate is at a lower level to avoid double taxation.   The amount has already been taxed through the Corporation.   Other factors have to be considered when determining which is the best way to withdraw your remuneration like how much money the Corporation is generating.

To really know what the ideal solution for you is to make use of professional advice that comes from a quality accountant.   This expert will look at the total picture that makes up your Corporation as well as your personal circumstance.

Something else to keep in mind is that the rules and regulations can change whenever the CRA sees fit to do this.   Plus, the financial changes that take place in a company throughout the year will also determine which is a better method for you to use when withdrawing money.   So it is something that you need to determine on a year to year basis along with the direction and assistance of your accountant.

It is always better to preplan for these types of financial dealings rather than wait till the end of the year tax time.   In most cases those who own a business need a steady income as well.   If a payment plan is not implemented it can become risky to just withdraw money as needed for personal use. It is hard to keep track of and spending can easily get out of hand.

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Sam Seidman, CPA, CA, LPA
629 Sheppard Avenue West
Toronto, Ontario
M3H 2S3

Telephone: (416) 398-1700
Fax: (416) 398-6226

Chartered Professional Accountant, Chartered Accountant, Licensed Public Accountant


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