Should business owner's take a Salary or Dividend?

Salary or Dividend for the Owner

Are you considering taking funds out of the company?  As an owner, your company is a separate legal entity from you.  There are generally three ways in which you can withdraw money from the company.

In the instance you may have loaned funds to the company either by paying for expenses on behalf of the company or providing an initial loan to the company during the start up stage, as a shareholder, you can withdraw money from the company as a settlement of the loan.  This would be a transaction in account of capital (i.e. loan repayment); therefore, a shareholder will not be taxed on this repayment.

The second way that a shareholder can withdraw funds from the company is through salary.  The benefit of paying a salary is that you can deduct the salary in the business which will result in lower corporate taxes.  Also, if you value the Canada Pension Plan (CPP), you may find taking salary valuable since it is a requirement to contribute to CPP and EI.   Now this can be the downside of taking salary as a portion of the pay is remitted to the Receiver General for CPP, EI and withholding taxes and you net after tax cash intake is less.  Also, it can be an administrative hassle to set up a payroll account with the CRA and determine how much to remit on the 15th of the following month.

Lastly, the final way to be compensated from the corporation is to declare a dividend.  The benefit of dividends is that it is less of an administrative pain.  Simply issues a cheque and note down “dividends” in the memo and update the corporate minute book.   Also, $35,000 of dividends paid to the shareholder will be free from personal tax based on the concept of integration.  Through the use of dividends and if shares are issued to your spouse, there are some tax splitting opportunities. 

For more information on the topic please contact an MP Group expert.

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