With the end of the calendar year poking its head around the corner, many entrepreneurs are thinking about the cashflow and tax impacts of paying themselves through their corporations. Determining whether salary or dividends are better for you depends on several factors and there really is no one-size-fits-all solution for all corporate shareholders. Consideration needs to be given to things like your personal financial needs, tax implications, and the financial health of your business. What may be beneficial for one situation might not be the best for another. Here are some considerations to help you evaluate which option might be more suitable for you:
Stable Income: If you require a predictable and stable income, a salary might be the better option. It can provide regular cash flow to meet your personal financial needs.
Tax Deductions: Salary payments may offer more opportunities for tax deductions, such as contributions to tax remittances and CPP, which can reduce your overall tax payment requirement when taxes are due in April.
Credibility: If you need to demonstrate a stable income for personal financial purposes, such as obtaining a mortgage or loan, a salary may provide more credibility.
Tax Efficiency: Dividends can be taxed at a lower rate than salaries in many jurisdictions, potentially resulting in tax savings.
Profit Sharing: If your business is generating significant profits, distributing dividends allows you to directly share in the success of the company.
Simplicity: Paying dividends can be administratively simpler, with fewer regulatory requirements compared to setting up a formal payroll system.
Flexibility: There can be more flexibility in your cash flow plan with dividends, as the plan can adapt to your personal cash needs and any fluctuations in cash requirements or excesses the business generates.
It's crucial to consider the specific tax rates and regulations in your jurisdiction, as well as your personal financial situation and long-term goals. In some cases, a combination of both salary and dividends might be the most effective strategy. Consulting with a tax advisor can provide you with tailored advice based on your unique circumstances and help you make an informed decision that aligns with your financial objectives.
Reach out to chat about your personal and corporate tax planning strategy at firstname.lastname@example.org . Happy planning!