In previous blog posts, we discussed the shareholder’s loan and dividends; in this one, we will follow up on that topic and talk about whether as a business owner, you should take a salary or a dividend at a high level. In theory, you should be indifferent to whether to take a salary or a dividend due to the theory of integration.

How does a salary or bonus work?

A salary or a bonus can be considered as one level of taxation, at the personal level, and is received in the form of a T4 slip. In the case of business, any salary and associated source deductions (CPP, EI, and income tax withheld) are deductible from the business’ net income. On the flip side, the individual receiving the T4 slip will record the income from the slip as a part of the year’s taxable income.

How does a dividend work?

See our prior blog post for a refresher. Dividends are paid from after tax income, meaning that part of the tax is paid in the corporation, and part is paid at the individual level.

What is Integration?

The tax system aims for income from a salary or bonus (as a T4) to be equal to that of a dividend after considering both personal and corporate taxes. Unfortunately there will always be minor differences, so one will have a small advantage over the other and integration will be different depending on which province you reside in. For most situations, the difference is only 0-2% either way.

Other Considerations:

Canada Pension Plan (“CPP”)

Contributions to CPP are mandatory if salaries or bonuses are paid. For business owners, they must pay both the employer and employee portions. Each portion is $3,499.80 using 2022 rates. While it is a useful retirement tool, keep in mind that this is cash locked up until retirement. You should consider whether CPP will be a part of your personal retirement plan.

Registered Retirement Savings Plans (“RRSP”)

Only earned income contributes to increasing your RRSP room, so this is only restricted to salaries in this case. This will be discussed in a future blog post, but RRSPs (or other various Registered Pension Plans), are another useful way to defer taxes and save for retirement.

Penalties and Interest

One of the most painful mistakes to make when dealing with taxes is the late payment of source deductions. The penalty starts at 3% and goes to 10% after being late for only seven days. Interest is also charged at the prescribed interest rate on late payments (as of December 3, 2021, this is 5%). Those paying salaries have to be disciplined in paying their source deductions on time otherwise the avoidable penalties start to add up fast.

Your accountant should be able to help calculate whether a salary or a dividend will be more tax advantageous for you. After considering the numbers, as well as the above, you should be able to decide which remuneration plan is right for you!