BVA Blog

Wages vs Dividends

Tuesday, July 14, 2015

Wages vs Dividends
We are often asked by small business owners if it is better to pay dividends or wages. The answer is that it depends on how you want to build your retirement income.

Wages
The advantages of wages are:

  • Wages increase the individuals RRSP contribution room. The idea here is that RRSPs will be contributed to through the individual’s lifetime up to the age of retirement. This reduces the income they are taxed on in the current period, and shifts this income into a later period, where the tax rate is likely lower then what you would pay currently.
  • Wages increase the CPP contributions and therefore the pension you will receive when you decide to retire and start collecting this pension. Most individuals start collecting CPP at age 65 to avoid receiving a penalty for collecting early. The earliest you can start collecting is 60 years of age. 
  • Unlike dividends, which can only be paid to shareholders, wages can be paid to other family members as long as they are reasonable for the work performed by that family member. An example of this is you cannot pay your daughter as a secretary the same that you would pay yourself as the company owner as CRA would deem this unreasonable.
  • If you have a disability, as defined by CRA, and pay a minimum of $5100 each year, you will have the opportunity to qualify for CPP disability benefits that are paid on a monthly basis.
  • Depending on your disability coverage you may need to pay wages to qualify for a disability payment if you become disabled. WCB includes dividends but that may not be the case for your other coverage.


Dividends
The advantage of dividends is that the individual pays less income taxes on dividends versus wages as dividends are an after tax distribution to the shareholders. The company however pays more income taxes as dividends are not a tax deduction like wages for the company. The combined taxes paid, however, are lower when wages are paid and the CPP is included.

Let’s work through couple of examples for 2015. Assuming there are 2 owners and they split the wages or dividends equally. The dividends are “other than eligible” dividends.


Excel Company

Excel Company

Fantastic Company

Fantastic Company

Wage

Dividend

Wage

Dividend

Income before wages

$150,000

$150,000

$500,000

$500,000

Wages

-$50,000

0

-$100,000

0

Taxable income

100,000

150,000

400,000

500,000

Taxes paid by company

14,000

21,000

56,000

70,000

Wage paid to each of 2 owners

25,000

50,000


Dividend paid to each of 2 owners


25,000

50,000

Gross up for tax purposes


x 118%

x 118%

Each Individuals taxable income

25,000

29,500

50,000

59,000

Total Taxes paid by 2 individuals

4,584

428

17,206

7,803

Total Taxes paid by company

And 2 individuals

18,584

21,428

73,206

77,803

If you are less than 65 years of age you must contribute to CPP. CPP premiums for the individual must be matched by the company. The maximum in 2015 is $2,479.95 x 2 = $4,959.90 per individual. If you are between 65 and 70 years of age you must elect not to contribute to CPP.

Plus CPP premiums4,2579,207
Total tax and CPP$22,841$21,428$82,413$77,803

If your retirement plan includes CPP and contributing to a RRSP then you will want to pay wages. However, if your retirement plan is to build up your company and draw from it in the future, then you will want to pay dividends.

Both are valid methods to retirement planning. Please come speak to us if you require any additional information or have any further questions!

Back to Blog

Latest Updates at BVA

Get an ever-expanding collection of inspiring, informational, and instructional news & updates from Burns Valkenburg & Associates.

Contact Burns Valkenburg

Head Office

101-2248 13th Ave SE
Medicine Hat, AB T1A 8G6

Phone: 403‑527‑8114

Intuit

QuickBooks Pro Advisor Experts

Receive discounted pricing off the regular price on QuickBooks products through Burns Valkenburg & Associates.

MEDICINE HAT HEAD OFFICE

Burns Valkenburg & Associates LLP

#101‑2248 13th Avenue SE

Medicine Hat, AB Canada

T1A 8G6

Phone: 403‑527‑8114

Fax: 403‑526‑0908

SERVICE AREA

Medicine Hat
Brooks
Bow Island
Maple Creek
Oyen
Foremost

Send to a friend

Send the url of this page to a friend of yours

Created by

Legal notice