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Wages vs Dividends

Wages vs. Dividends

If you own an incorporated business, there are two primary ways to pay yourself:

  1. Salary, and/or
  2. Dividends

If you pay yourself salary, the amount is a deductible expense to your company and is taxable in your hands. You will be required to deduct income tax and CPP premiums from your salary.

Alternatively, you can have the income taxed in your corporation and then pay the after-tax earnings to yourself, as dividends, which is not deductible for the corporation. Dividends are payments made to company shareholders from the profits of the company. If the company has not made a profit over a given period then it cannot pay a dividend. With dividends, you would need to complete a T5 return: Return on Investment Income.

You’ll face tax on the dividends paid to you, but at a lower tax rate than salary.

Why?

Since, the corporation has already paid tax on the income when dividends are received, the amount is “grossed up” and then you are entitled to a dividend tax credit (to provide a tax credit for the approximate tax that was paid by the company).

Pros and Cons when considering Salary or Dividends:

Salary Pros

Salary Cons:

 Dividends Pros:

 Dividends Cons: