Salary vs. Dividends

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As a business owner, choosing between salary and dividends is a crucial decision that impacts both your personal finances and your company's tax situation. Here's an overview of the key differences:

Salary
Salary is a regular payment for services rendered to your corporation. When opting for salary:
Your corporation can deduct the salary from its taxable income, potentially lowering corporate taxes.
Income tax is withheld at the source, resulting in lower taxes when filing your personal return.
You generate RRSP contribution room, allowing for additional tax-deferred savings.
You contribute to the Canada Pension Plan (CPP), building future retirement benefits.
The corporation must remit payroll taxes and prepare T4 slips.

Dividends
Dividends are distributions of a corporation's after-tax earnings to shareholders. When choosing dividends:
The corporation cannot deduct dividend payments from its taxable income.
No income tax is withheld at the source, potentially requiring you to pay quarterly tax installments.
Dividends do not generate RRSP contribution room.
You do not contribute to CPP, potentially affecting future retirement benefits.
The corporation must prepare T5 slips for dividend payments.

Tax Implications
The tax treatment differs significantly:
Salary is fully taxable at your personal tax rate.
Dividends benefit from the dividend tax credit, resulting in lower personal taxes.
Eligible dividends (from income taxed at the general corporate rate) are taxed more favorably than non-eligible dividends (from income taxed at the small business rate).
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Salary vs. Dividends