Dividends may slightly reduce the overall tax costs (corporate and personal) as compared with salary
If the only source of personal income was from ineligible dividends, it was possible to receive up to $32,784 in 2023 without paying any personal income tax other than the Ontario Health Premium. (Eligible = $55,002)
Dividends do not require you to contribute to the Canada Pension Plan (CPP), Employer Health Tax (EHT) or the Workplace Safety and Insurance Board (WSIB)
Dividends will provide more opportunities for income splitting with your family
Dividends do not require the recipient to perform services for the business, whereas salaries must not exceed a “reasonable” remuneration for the services rendered to the business
The payment of dividends does not require an immediate personal income tax payment; salaries require income tax and CPP amounts to be withheld by the employer and remitted within days or weeks
If there are insufficient corporate profits to make use of the tax deduction for salaries, dividends may be more tax-efficient
Some of the advantages of salaries
Salaries provide opportunities for deferring taxes by maximizing RRSP contribution room
Corporate taxes can be deferred by accruing bonuses
Salaries are required to qualify for future Canada Pension Plan benefits
The distribution of salaries among shareholders may be more flexible than dividends
Salaries paid to children are taxable at normal rates, whereas dividends paid to children may be subject to tax at the highest rates
Salaries entitle the recipient to the Canada employment credit
If the company’s taxable income exceeds $500,000, salaries can reduce that income to eliminate any corporate income tax that would be payable at the higher corporate income tax rates
A requirement for quarterly personal income tax instalments in future years may be one result of paying dividends
If personal income is so low that the dividend tax credit would be unused, a salary may be more tax efficient
