Dividends Versus Wages For Business Owners

One of the more complicated questions for incorporated business owners is the wages versus dividends question. The best advice here is, “Talk to your accountant!” 

Your accountant can examine different scenarios with you and help you decide which plan results in your best results, for what you are trying to accomplish. You might want to maximize your CPP and RRSP contributions for this year, or you might be trying to maximize dividends to re-invest in the company or give you more flexible income—these would be two different ways of handling wages versus dividends.

Paying salaries can be more complicated than paying dividends, since you will need to set up payroll accounts with Canada Revenue Agency and keep them current. On the other hand, paying dividends can make your income hard to prove for things like mortgages and loans. Paying wages will give you RRSP room; if you pay yourself dividends, you can use that money for investment for the future in any way you choose.

For some extra info on this subject, have a look at this article from Advisor.ca. Remember that each situation is unique and should include some discussion with your accountant.

As a spouse of a business owner, you would also probably want to talk to an accountant to decide how to handle any potential income from the company. If the spouse is made a shareholder of the company, the spouse can receive a reasonable amount of dividends from the company with some newly introduced requirements that need to be met.

Alternatively, a spouse can be employed by the company and have benefits like CPP paid into, but there are requirements for the spouse to do necessary work for the company and be paid a reasonable salary for work performed. This is an area where Canada Revenue Agency is likely to take a close look at spouses employed by companies, to make sure they aren’t just employees on paper for tax savings.

Bottom line—this is a multi-faceted question, that can be answered best by an expert in tax planning.

Contact Shaw & Associates Chartered Accountants to help you out with your financial needs and tax planning and to give you the advice and services that will take you from where you are to where you want to be with your business. One complimentary meeting with us will put you and your business on a more profitable and positive path.