Salary or dividends: Which is best for you?
UPDATE: FEBRUARY 6, 2024
As a shareholder and employee of your corporation, what’s the best strategy to withdraw funds from your company to meet your family’s needs?
Your goals as a shareholder are influenced by life events that can affect the annual distribution between salary and dividends. You can choose to receive:
- A salary
- A bit of both: a salary plus dividends to enjoy the advantages of each
During working life
Why choose dividend payments?
- If you have financial expenses that you want to deduct from your provincial taxable income, dividends are investment income that will enable you to do so.
- If your taxable income is greater than the highest tax bracket of $246,752 in 2024 and you wish to lower your tax bill, it’s better to opt for dividends. The tax rate of dividends is 48.0% or 40.1% (depending on the type of dividend), which is lower than that of a salary (53.3%).
- If your cash flow needs are low, you can opt for a dividend, allowing you to pay minimal tax. For example, in 2024, you won’t have to pay tax on non-eligible dividends for a maximum amount of $34,320 at the federal level and $20,780 in Quebec, if that’s your only taxable income.
Why choose a salary payments?
- If you know that your current tax rate is higher than it will be when you retire, receiving a salary would enable you to contribute to your RRSP and withdraw these funds at a lower rate when you retire. For example, if your income tax rate is 50% when you contribute to your RRSP and 36% at retirement, you will have earned tax savings of 14%.
- If your company offers employees various group plans (such as life insurance, disability insurance or a pension fund), a salary will enable you to take advantage of these benefits.
- Small businesses aren’t always able to offer their employees group plans, so choosing a salary qualifies you for the Quebec Pension Plan (QPP) disability pension. If you’re not eligible for private plans, the coverage you could receive with this disability pension is something to consider.
- Corporations can benefit from a reduced tax rate. At the federal level, the tax rate can drop from 15% to 9% for the first $500,000 of business income. In Quebec, the tax rate can be reduced from 11.5% to 3.2% for this first $500,000 if the hours the company has paid to all its employees total at least 5,500. The payment of a salary can facilitate taxation at these reduced corporate rates.
- If you have children or wish to have children, opt for a salary. Doing so will help you take advantage of the Quebec Parental Insurance Plan (QPIP) benefits on the birth or adoption of a child. The maximum insurable earnings is set at $94,000 in 2024. Your yearly childcare expenses are factored into your tax returns if you receive a salary. This isn’t the case if you only receive a dividend. To determine taxable income, dividends are increased by 15% or 38%, as the case may be. This means that a dividend will increase the income used to calculate the Canada Child Benefit (federal) and the Family Allowance (Quebec). It can therefore reduce your benefits.
Why pay a little of both?
If you are in both the favourable situations described above that facilitate paying a dividend and a salary. For example, in order to recover a portion of the tax on investment income from the paying company and you pay care expenses (salary).
Preparing for retirement
- You can withdraw the surplus from the company in the form of a salary and dividends in order to place it in another investment vehicle.
- You can let the surplus accumulate within the corporation and withdraw it upon retirement in the form of a dividend.
If you have a more aggressive investor profile, you may want to leave the entire surplus in the corporation. Upon retirement, you’ll receive dividends generally taxed at a lower rate than RRSP withdrawals. If you don’t have investments outside your corporation, you may be left with few options in the event of a financial problem within the company. The Old Age Security (OAS) pension could then become your only source of income if you’ve never received a salary.
How to create a safety net
Pay yourself a salary so that you receive the QPP pension on retirement (maximum contribution in 2024: salary of $68,500). You can also vary your sources of retirement income since a salary allows you to contribute to your RRSP.
Good to know
QPP and RRSP funds may not be available to creditors if you or your corporation experience financial troubles.
You’ll be taxed upon withdrawal of your RRSP. However, you can split the tax with your spouse if you’re 65 or older. You’ll each be able to take advantage of the pension income credit in addition to benefiting from lower tax rates.
Since the dividend is increased in the taxable income calculation, the possible OAS loss must be included in your tax rate calculations on retirement. In fact, the beneficiary will have to repay a portion of it in 2024, as soon as their income exceeds $90,997. The full amount will be repaid if income exceeds approximately $148,064.
We recommend that you re-evaluate your compensation strategy yearly to help you reduce your tax bill.