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Salary Versus Dividend Income the Remuneration Process for the Owner-Manager

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Salary Versus Dividend Income the Remuneration Process for the Owner-Manager NavigatorThe RBC Wealth Management Services Salary versus dividend income The remuneration process for the owner-manager The type of remuneration, whether it be salary or dividends, that an owner- The Serber Team manager decides to draw from their business will have an impact on both the owner-manager and their corporation. This article discusses the tax David Serber, FCSI, CIM implications of receiving a salary versus dividends as well as some non- Vice President, Portfolio Manager and tax considerations that are of importance when deciding which form of Wealth Advisor remuneration you, as an owner-manager, should take. [email protected] 416-974-3530 This article outlines several strategies, not all of which will apply to your particular financial circumstances. The information in this article Rosetta (Rosey) Perrino is not intended to provide legal or tax advice. To ensure that your own Associate circumstances have been properly considered and that action is taken [email protected] 416-974-1726 based on the latest information available, you should obtain professional Please contact us advice from a qualified tax advisor before acting on any of the information 2345for moreYonge Stinformationreet, Suite #1000 in this article. Taboutoronto, Onttheario, topicsM4P 2E5 wwwdiscussed.davidserber in .cthisom Types of remuneration Salary remuneration 1-800-766-1034article. As an employee and shareholder At the corporate level of a Canadian-Controlled Private ● Salary paid by your corporation Corporation (CCPC), you have is considered a tax deductible the flexibility of receiving your expense and will lower the remuneration in the form of a corporation’s taxable income. salary, dividend, or a combination of both. The most tax-efficient type ● In order for a salary payment to of remuneration for you and your be deductible by the corporation, corporation will be a determining the amount paid must be factor in which one you choose. The reasonable. For owner-managers, tax treatment of salary and dividend reasonableness is generally not income is different at both the an issue provided you are actively corporate and individual level. The engaged in the operations of the following discusses some of the tax corporation and contribute to the implications and other considerations profits earned by the corporation that you should keep in mind when using your special know-how or deciding on the type of remuneration entrepreneurial skills. to receive. 2 | RBC Wealth Management ● The corporation will incur Dividend remuneration an additional expense in the At the corporate level form of payroll taxes when a ● A dividend payment is not a deduc- salary payment is made. The tible expense for the corporation. corporation has to match an employee’s contribution to the ● Since dividends are paid out of the Canada Pension Plan (CPP)/ corporation’s after-tax retained Quebec Pension Plan (QPP). The earnings, they have already been A dividend payment corporation may not have to subject to a level of tax within the is not subject to the match an employee’s contribution corporation. reasonableness test. to the Canada’s Employment Instead, corporate Insurance (EI) program where the ● A dividend payment is not subject solvency tests may employee is also a shareholder. to the reasonableness test. Instead, need to be used and This is because EI premiums are corporate solvency tests may not required for an employee who need to be used and restrictions restrictions on the is also a shareholder controlling on the capital stock itself should capital stock itself more than 40% of the voting stock be identified when determining should be identified of the corporation. Voluntary whether a dividend can be paid and when determining participation is permitted. the amount of the dividend that whether a dividend can can be paid. be paid and the amount ● Salary paid by the corporation of the dividend that can may attract other payroll expenses ● Canadian corporations may pay be paid. such as provincial workers’ both “eligible” and “non-eligible” compensation and health tax dividends. Eligible dividends payable by the corporation generally include dividends (depending on the province in paid by Canadian corporations which the corporation is located or CCPCs that are subject to the and the thresholds in that province). general corporate tax rate. Income of a CCPC that was subject to ● Salary paid by the corporation the small business corporate tax will be subject to tax and payroll rate will generally be paid out as withholdings at the source (e.g., non-eligible dividends, which income taxes and employee’s are taxed at a higher rate than portion of CPP/QPP). eligible dividends at the individual level. The dividend may also be At the individual level designated as a capital dividend ● The gross amount of salary income if the corporation has a positive (before source deductions) is balance in its capital dividend employment income and is subject account. Capital dividends are to tax at your marginal tax rate in generally available where the the year it is received. corporation earns capital gains. Capital dividends may be paid to ● You may be eligible for non- a Canadian resident shareholder refundable tax credits in addition to tax-free. the basic personal amount. Some of the federal non-refundable tax At the individual level credits include a credit for CPP/ ● An individual may be required to QPP contributions made by you, pay quarterly tax instalments if personally as the employee, and the their income taxes payable (after Canada employment amount. deducting taxes withheld at source) RBC Wealth Management | 3 is more than $3,000 ($1,800 for RRSP contributions. Then pay Québec) for the current year and dividends to supplement your either of the two preceding years. If income needs. you receive primarily dividends or only dividend income, you need to ● Contributions to an RRSP are be mindful of a possible quarterly deductible against any type tax instalments requirement since of taxable income including your dividend income will not dividend income. If you have be subject to withholding tax at other funds available to make an source. RRSP contribution and have used RRSP contribution room, you ● A dividend payment is grossed-up may be able to benefit from the by an additional 17% (if non- tax deduction in the current year eligible) or 38% (if eligible) to resulting in greater after-tax cash arrive at the taxable amount that flow to you. Salary income is considered is included in an individual’s pensionable earnings for income. For example, if you receive ● Salary income is considered CPP/QPP purposes while an actual dividend of $1,000, pensionable earnings for CPP/ dividend income is not. you will need to include $1,170 QPP purposes while dividend Therefore, if you receive or $1,380 of income on your tax income is not. Therefore, if you salary income, you may return depending on the type receive salary income, you may be entitled to CPP/QPP of dividend you receive. Due to be entitled to CPP/QPP benefits benefits. this gross-up, the amount of the (which may include a retirement taxable dividends may have a pension and survivor, death and bigger impact on your eligibility disability benefits available to CPP/ for certain income-tested benefits, QPP contributors and their family such as the Old Age Security. members). ● ● In addition to the basic personal An owner-manager who receives amount, you will be eligible for pension-eligible income may be a a non-refundable dividend tax candidate for an Individual Pension credit which is meant to reflect the Plan (IPP), which is a defined corporate taxes already paid on this benefit pension plan established income prior to distribution. by a corporation for an individual. Pension-eligible income includes Other considerations salary income but does not include ● RRSP contribution room is dividend income. calculated based on “earned ● The ability to contribute to an income”, which includes salary RRSP/IPP allows you to grow your but not dividend income. If your investments on a tax-deferred only source of income is dividend basis. income, you will not be able to build RRSP contribution room. Conclusion ● The maximum RRSP contribution The form of compensation you receive room is limited to the lesser of from your corporation should depend 18% of your “earned income” and on your facts and circumstances as a maximum threshold. Paying well as your corporation’s financial a salary beyond this level does position. Both tax and non-tax factors not yield any additional RRSP should be considered when selecting contribution room. If you live in the type of remuneration you wish to a province where there is a tax receive. You should discuss this matter advantage to paying dividends with a qualified tax advisor to help (versus salary), consider still paying determine which option is best for you. sufficient salary to maximize your 4 | RBC Wealth Management Appendix 1 – Salary versus dividend examples The following examples are for illustrative purposes only. The examples are calculated based on federal and provincial legislation and legislative proposals for 2016. You should obtain professional advice from a qualified tax advisor before acting on any of the information in this appendix. This will ensure that your own circumstances have been considered and that action is taken based on the most recent information available. The following examples illustrate the tax implications to the corporation and to the individual in cases where remuneration is received in the form of salary, dividends and a combination of salary and dividends. The examples use the 2016 combined federal and provincial tax rates. The examples assume that the individual requires $100,000 of after-tax money to fund their lifestyle needs and that the individual has no other income.
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