Dividend vs. Salary

For Professional Corporations and Incorporated Farms in particular, we sometimes get the question whether it's better to draw salary or dividends as personal income.

Some accountants and financial advisors subscribe to the belief that dividends are inherently preferred and “cheaper” because Canada Pension Plan (CPP) contributions are considered to be a tax savings in comparisons.  Dividends don’t give rise to CPP contributions.  

But this may be too simplistic of a view.  In truth, CPP is not a tax.  It is a pension, as the name implies.  Many incorporated business owners do not realize that they are forgoing future CPP retirement benefits when they opt out of contributions.

 
Another consideration is that even though the business pays both employer and employee portions of CPP, the business gets a deduction for CPP on their portion of contributions as employer, and the individual gets a tax credit as employee.  The bottom line is do not confuse CPP contribution savings as tax savings, especially when it can form part of the bigger retirement planning picture. 

Another consideration is RRSPs.  RRSP contribution room is based on earned income, including salary, but does not apply to dividend income.  Even if RRSPs aren’t maximized each year, building RRSP contribution room can be a valuable tool for exit strategies at retirement.  We see this with farming in particular.  When farm assets such as equipment and inventories are sold it can create a high level of taxable income in a year without offsetting farm input expenses.  RRSPs can offer some significant reprieve at that time - provided you've built up the contribution room to take full advantage. 

While tax integration between personal and corporate taxes isn’t perfect in Canada and varies by province, it is reasonably close.  Regardless of your province of residence, the same considerations and evaluation of salary vs dividends should apply.

As with all financial planning matters, these decisions should not be made in a vacuum.  Every situation is unique and it is best evaluate the pros and cons with the help a of professional.

Chris J. Veilleux, CFP, CLU, FMA, FCSI, CPCA, EPC
President & CEO
Prairie Wealth Planning Consultants Ltd.