Tax Consequences of Wages Compared to Dividends

This article describes several strategies that not all can apply to your specific financial situation. The information contained in this article is not intended to provide tax or legal advice. To ensure that your specific situation is duly considered and that any initiative is based on the most up-to-date information available, it is important that you receive professional advice from a qualified tax consultant before acting on the basis of any information faith in this article.

As an employee and shareholder of a controlled private corporation (CCPC), you can receive remuneration in the form of wages, dividends, or a combination thereof. An important factor that must be considered when determining the form of remuneration received is what type of remuneration will lead to the most positive tax result for you and your company. The tax regime for income from wages and dividends differs from both a corporate and an individual point of view. This article discusses some tax consequences and other factors that must be considered when deciding which type of compensation to receive.

The salary paid by your corporation is considered a deductible amount for the purposes of taxing the corporation and, therefore, will result in a reduction in the taxable income of the corporation. In order for a payroll to be deducted for the company, the amount paid must be reasonable. For owners-managers, the question of reasonableness will usually not be a problem as long as you work in a company and contribute to the profit it earns using your specific know-how or your entrepreneurial skills.

Note. Salary is the main expense item of any organization and in any business. The economic security and stability of the company depends on the payment of taxes.

The company will incur additional costs in the form of social contributions for the payment of wages. The corporation must make an appropriate contribution to the employee’s contribution to Canada / Quebec Pension Plan (CPP / QPP). The corporation may not require participation in the Canadian Employment Insurance (EI) program when the employee is also a shareholder of the corporation. This is because bonuses for EI are not required for an employee who is also a shareholder controlling more than 40% of the corporation’s voting shares. In addition, optional participation is permitted.

Salaries paid by a corporation may result in other salary costs, such as those associated with provincial employee compensation plans and health taxes payable by the corporation (depending on the province in which the corporation is established, and thresholds for salary expenses fee). in this province). Salaries paid by the corporation will be subject to income tax and other deductions (i.e., income tax and CPP / QPP employee contributions). On an individual level. The total amount of income from wages (before deductions at source) is income from work and is taxed at your marginal tax rate in the year in which the income was received. You can take advantage of some non-refundable tax credits in addition to the basic amount of personal exemption. Among federal non-refundable tax credits, there is a loan for your CPP / QPP contributions and a Canadian employment amount.

Dividends are not deductible for the company. Since dividends are paid from retained earnings of the Company, these payments are already taxed at the Company. Dividend payment is not subject to reasonable verification. However, criteria for a company’s solvency and capital restrictions may be required to determine whether dividends can be paid and, if so, how much can be paid.

Shareholder liability is limited to their down payment for monthly dividend stocks. The company is a legal entity separate from its shareholders. Continuation of existence: the company does not cease its activities in the event of the departure or resignation of a shareholder. The company projects a more serious image on customers than on an individual entrepreneur. A company shareholder can choose between various forms of remuneration: salaries or dividends.