As a business owner, determining the most effective way to compensate yourself involves weighing the advantages of different methods, primarily between drawing a salary and receiving dividends. Both options come with their unique financial implications and tax treatments, making it essential to understand their impact on your personal and business finances. Paying yourself a salary ensures a consistent income, contributing to your personal credibility in financial matters such as loan applications. It also means you’re paying into the Canada Pension Plan (CPP) or a similar system, which can benefit you in the long term. However, salaries are subject to higher personal income tax rates compared to dividends.
Opting for dividends as your compensation strategy offers flexibility and tax efficiency. Dividends are paid out of the company’s after-tax profits, which means they are taxed at a lower rate on your personal tax return due to the dividend tax credit in Canada. This can result in significant tax savings, especially if your personal income places you in a lower tax bracket. Furthermore, dividends do not require CPP contributions, which reduces immediate out-of-pocket expenses but also impacts your future CPP benefits. The choice between salary and dividends affects your tax planning and cash flow management, necessitating a careful analysis of your financial situation and long-term goals.
Making an informed decision on how to pay yourself as a business owner involves considering not just the tax implications and personal benefits but also how each option aligns with your business’s financial health and growth strategy. This infographic looks at the key benefits of paying yourself a salary or paying yourself dividends so that you can make a decision that works best for you and your business!
