Should I take dividends or should i take a salary out of my corporation?

Hello everyone. I’m Jon Sears from Sears Chartered Accountants. Today we are going to talk about an important topic: “Should I take dividends or should I take a salary out of my corporation?”

The biggest thing that you need to consider is whether you want to maximize your RRSP contribution every year. Right now if you take $128,000 in salary, it will maximize your RRSP contribution which is $23,700 for the year 2012. Basically, anything after that is typically better to take out as dividends because you have already maximized your RRSP’s and you want to minimize your total tax. If you are not a believer of RRSP and you don’t make regular RRSP contributions or you have a ton of room, it likely makes sense to just take the dividends.

Why you want to take dividends? The main advantage is that it is attracting lower tax when you look at dividends plus the corporate tax rate. You have to look at those two tax rates together, total tax paid versus just the salary. And more often than not, you are going to be paying less tax with the dividend. So very often, the dividend route is the way to go in that particular situation. Another great advantage with dividends is you don’t have to deal with payroll taxes.

Payroll taxes as many of you knoware quite difficult to deal with, because they very often have to be on the 15th of the following month and If they are not in on time, there is a 10% penalty, sometimes up to 20% if you are a repeat offender. If you go the dividend route, you don’t have to worry about making these payroll installments on a regular basis anymore. So this is a lot easier.

Another advantage of going with dividends is you no longer have to deal with payroll taxes. Though EI is optional CPP is still necessary and has to be paid if you going with salary. So by going with dividends you no longer have to worry about paying CPP. All you have to worry about is paying your income tax at the end of the year. so basically dividends are a much more tax efficient way of getting money out of the corporation unless you want that RSP room that’s generally what it comes down to.

Remember, for an accountant you can count on, call this CA today.