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Shareholders of Canadian companies enjoy a so called dividend tax credit.

Basically, this means a reduced rate of tax on the dividends paid by the company to the shareholder.

That makes me think....if I open up a corporation, and instead of paying myself a salary, I pay a small salary and pay a large dividend (I am an employee and also a shareholder), can I significantly save on taxes?

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It doesn't make much difference in the end. Imagine you have $100 of revenue in your company. You can either pay it to yourself as salary, meaning that you don't pay corporate tax on it, or you can keep it in the company, pay corporate tax on it, then pay yourself a dividend of what is left. While that dividend will be treated better than salary, remember that the company already paid tax on it. You paying less on what's left doesn't equate to paying less overall.

Go ahead and run the numbers using your actual corporate tax rate and your personal income tax rate. Try doing your whole salary as dividends - not dollar for dollar, but as how much the company would have as profit to give you a dividend if it didn't spend (and deduct) salary money on you. You are unlikely to see any difference at all. The net final money in your pocket, and the amount that went to the government, will probably be the same.

If paying dividends keeps your earned income low, you may find that you can't use RRSP or childcare deductions. You are also not getting CPP credit. That's an argument for salary, or at least a certain minimum amount of salary. You have to deduct taxes at source on salary and send it along to the government, which is an argument for dividends if you feel you could invest that money and use it well before the taxes get around to being due.

Possibly you may discover an edge case where you move a few thousand from one marginal tax rate to another and clear a few hundred extra as a result. I don't discourage you from doing the math, I just point out that the various percentages (tax rates, grossups, deductions etc) have all been carefully chosen so that it pretty much works out the same, or gives a small preference to salary.

We give excess money to ourselves as bonus rather than dividend having run the numbers a few times. There's no secret trick here.

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    I'm sure with a bit more imagination it would be possible to come up with a semi-workable tax scheme, probably involving tax havens, misused tax breaks, offshore trusts and shell companies. – user3490 Dec 1 '14 at 23:07
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    The other disadvantage of paying via dividend rather than salary, is that the former is not usually taken into account as "income" by Mortgage lenders etc, since it can fluctuate. Obviously this is only relevant if you're looking to take out a mortgage: if you already own your home it will be irrelevant. – Jon Story Dec 2 '14 at 13:33
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In theory the integration of taxes make the tax implications of paying salary or dividends equal. This is what happens when you calculate the taxes using a generic tax calculator, however, the theory breaks down in certain cases.

If you are earning less than $100k there is very little difference and paying out a salary is usually the better option. In a large stable company the most efficient option is almost always a mix of both.

If you are earning more than $100k a year it depends on a number of factors:

1) Are your companies annual earnings over $500,000? In Canada, private companies that earn more than $500,000 annually are taxed at a higher rate than those earning less than $500,000. If the earnings are above $500,000 generally you should reduce the earning to under $500,000 by paying a salary. However, this depends on the province, the other income of the owners are and how much more than $500,000 your company earns.

2) Are you eligible for deductions or benefits only available on earned income? Earned income is income that you have worked for, which does not include dividends. RRSP contribution room, child care expense deductions, CPP, and many other benefits under the CRA rules are only available to people who have an earned income. It is worth taking advantage of these deductions when they are available.

3) Is your company eligible for any tax deductions? The same as with your personal tax deductions and your personal benefits of earning income, having a corporate income is also a benefit. There are a number of tax credits and tax deductions that corporations can take advantage of and when available these should be taken advantage of before paying everything out in salary.

Once all these questions are answered the calculation is based on your marginal tax rate and the tax rate of the Corporation.

One other reason to have at least a portion of you salary as a dividend is that if you incur capital loss in your corporation you can pass them to your personal taxes. If you were payed 100% in salary this does not work.


Other strategies to be more tax efficient: Income splitting (Pay a salary/dividend to yourself, your wife, your children your parents, or anyone you support). Rolling-over property with taxable gains into your private corporation. Buying insurance policies that gives a return of premium or increase your Capital Dividend Account (CDA).

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    Thanks for the tips. Can you provide some further reading reference for : Roll-over property with taxable gains into your private corporation. – Victor123 Dec 1 '14 at 21:18
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    @Victor123 Let me know if those links help. – IanEdington Dec 2 '14 at 3:41
  • As for your point#2: are you saying that only the portion of salary can be put to an RRSP? i.e a dividend cannot be put in an RRSP? What exactly is earned income. Does it exclude dividends? – Victor123 Dec 2 '14 at 15:06
  • Thanks @Victor123. Earned income is income that you have worked for, which doesn't include dividends. I have updated my answer to make this more clear. investopedia.com/terms/e/earnedincome.asp – IanEdington Dec 2 '14 at 16:00
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    @Victor123 Dividends can be deposited into your RRSP, but only to the extent that you already have available RRSP contribution room. You can only create RRSP contribution room with earned income. – Chris W. Rea Dec 3 '14 at 2:37

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