Educational

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). ​