Take control of your compensation with our salary vs. dividend advice

When you start your business and incorporate your company, you have several compensation options, each with tax benefits that can affect your business accounting.

Salary is paid to the business owner as an employee of their own company and is subject to withholdings such as income tax and social contributions (CPP, EI, etc.). This can be an additional cost to the business, but it also allows the business owner to contribute to certain beneficial social programs.

Dividends, on the other hand, are distributions of after-tax profits to shareholders and are not subject to the same withholdings as salaries. Although they usually benefit from a more favorable tax rate, the choice between salary and dividends depends on many factors. In theory, according to the principle of tax integration, the total tax paid by the entrepreneur should be similar whether through salary or dividends. However, there may be differences depending on the social charges and the financial situation of the company.

It is recommended to consult a tax professional to evaluate the best strategy according to your specific business situation.

Salary allows for contributions to the Canada Pension Plan (CPP), Employment Insurance (EI) and the Quebec Pension Plan (QPP), which can be beneficial for retirement and unemployment benefits. It is also deductible for the business, reducing its taxable income and increasing the amount the business owner can contribute to an RRSP.

Dividends, on the other hand, benefit from a tax credit that can reduce personal income tax. However, dividends do not provide access to social programs (QPP, EI, etc.).

The choice depends on your personal financial situation and your business objectives. If you're not yet incorporated and want to find out if it's the right solution for you, see our "Should I Incorporate" consultation.

To determine the optimal amount of salary and dividends, it is important to analyze your personal needs, long-term financial goals, and the performance of your business. A tax professional can help you develop a compensation strategy that maximizes your tax benefits while ensuring your company's financial stability. They can also take into account current tax rates and applicable tax rules.

Yes, contributions to the CPP, EI or other social programs are affected by your choice of compensation. For example, salary is subject to CPP and EI contributions, which can increase your retirement benefits and coverage in the event of unemployment.

Dividends are not subject to these contributions, which may reduce your ability to accumulate CPP and EI benefits or other social programs. It is important to consider these implications in your retirement planning.

An entrepreneur's compensation may vary based on fluctuations in business income. It is important to take a flexible approach that is tailored to your specific situation. Each case is unique, and the best compensation strategy depends on several factors, such as available cash flow and your financial goals.

Our tax advisors can help you with this consideration by offering a personalized consultation to evaluate the best approach based on your needs and your company's performance. If you also need help understanding the basics of business accounting, our team offers an "Accounting 101" consultation.