A few years back I have written an article about how to pay yourself, and in there we have compare the difference between dividend and salary. At that time the legislation of Trust (T3) has changed and therefore wasn’t a viable tax defer strategy and dividend were instantly became the next logical choice given the dividend tax credit. At that time dividend turned out to be a better tax saving strategy for business owners to pay themselves comparing to salary or management fee.
Over the years, things have changed, new tax rates and other new tax legislations have been introduced. The previous benefits dividend bring may not hold anymore comparing to paying through salary.
Let’s do a simple example using Ontario as the province with 2011 tax rates. Assume you are taking $100,000 to yourself from a company revenue of $200,000. Without going into all the detail calculations, here are the results:
T2 corporate tax:
- Pay yourself Salary with T4 of 100,000 (corp tax on 100,000 remaining): $28,248
- Pay yourself dividend with T5 (corp tax on 200,000): $56,496
T1 personal tax:
- T4 on 100,000: $27,992.15
- T5 on 100,000: $13,714.29
Total tax you need to pay:
- Salary T4: $28,248+$27,992.15 = $56,240.15
- Dividend T5: $56,496+$13,714.29 = $70,210.29
In this scenario T5 is not a good choice.
To make the story short, these changes are due to the lower tax rates and more tax credits for individual over the years which gives salary the advantage.