Once you incorporate your business you need to decide which is the best way to pay yourself, a salary, dividends or a mix of both. There are advantages and disadvantages to both salary and dividends for business owners.
Payment by Dividends
Payment by a Mix of Salary and Dividends
Whether payment in a mix of salary and dividends is the best way to go for a business owner is dependent on their personal circumstances including income level, cash flow needs, and the corporation’s predicted income for the next year. The owner needs to understand if he needs to have room to contribute to his RRSP and if income tax deductions are important. The decision to pay in a mix of salary and dividends should be made after discussions with an accountant or financial planner.
Sometimes a mix of salary and dividends is paid out by the company to ensure that it does not earn over $500,000 as this is the limit up to which a privately-owned company pays the lower rate of income tax. If earnings are greater than this, it can be better to pay the owner a salary thereby reducing the corporate income.
Sole Proprietorships or Partnerships
As these types of businesses are not owned by shareholders, they cannot issue dividends and the owners cannot be salaried employees with payroll deductions. Business income and personal income become the same thing, so you have no choice but to report your earnings on a T1 income tax return.
From an article by Susan Ward
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