From Corporation to Personal Account: Understanding Salary vs. Dividends

For many incorporated business owners, one of the first questions that comes up after the corporation starts making money is simple:

How do I get money from my corporation into my personal account?

Two common methods are salary and dividends. While both can provide you with personal income, they are treated differently for tax and payroll purposes.

Understanding the basics of salary vs. dividends can help you make informed decisions about how you pay yourself from your corporation and have more productive conversations with your accountant

Salary: Getting Paid for the Work You Do

Salary is money your corporation pays you as an employee for the work you perform.

If you receive a salary, your corporation has payroll responsibilities, including withholding and remitting applicable deductions. Salary is generally subject to CPP contributions, with both the employee and employer portions applying where required.

One potential benefit of receiving a salary is that it can create RRSP contribution room, which may be important if building retirement savings is part of your financial plan.

Salary can also provide a consistent and predictable source of personal income, which may make it easier to manage household expenses and plan your personal finances.

Dividends: Getting Paid as a Shareholder

Dividends are payments made to you because you own shares in the corporation.

Unlike salary, dividends are not employment income and generally aren't subject to CPP contributions in the same way as salary. They also don't create RRSP contribution room.

Dividends have their own tax treatment, and the personal tax you ultimately pay depends on factors such as the type of dividend and your overall income and circumstances.

For this reason, simply assuming that dividends are always the more tax-efficient choice can be misleading.

Salary, Dividends or a Combination?

As an incorporated business owner, you don't necessarily have to choose between salary and dividends. Depending on your circumstances, a combination of the two may be appropriate.

The right approach can depend on factors such as:

• Your corporation's profit and available cash

• Your personal income and financial needs

• CPP considerations

• Your RRSP and retirement goals

• How much cash your corporation needs to retain

• Plans to invest in or grow the business

• Other sources of personal income

• Your overall corporate and personal tax situation

  
  

For example, a business owner planning a major equipment purchase may want to retain more cash in the corporation, while another owner may have different personal income or retirement objectives.

There is no single salary or dividend strategy that works for every business owner.

Don't Take Money Out Without Recording It Properly

It's important to keep your personal and corporate finances separate.

Moving money from a corporate bank account to your personal account doesn't automatically make the payment salary or a dividend. The transaction needs to be properly recorded and treated according to its nature.

Good bookkeeping throughout the year can make this much easier and helps ensure your accountant has accurate information when preparing the corporation's financial statements and tax returns.

Clear records can also help avoid confusion about shareholder withdrawals and other amounts moving between you and your corporation.

Not Sure Whether Salary or Dividends Make Sense?

Our team can help you understand your options, determine an approach that considers both your business and personal financial goals, and handle the related payroll and dividend processing for you. Contact us to discuss your corporate accounting and tax planning needs.

The information contained in this article is for general educational purposes only and is not intended to replace professional tax, legal, or accounting advice. Each taxpayer’s circumstances are unique, and readers should consult with a qualified advisor regarding their specific situation.