Personal Finance, Business and Finance Solution

Should I take wages or dividends from my privately owned
corporation? What is the best way of taking money out
of my company? In other words, what will result in the
least amount of income taxes?

A Canadian accountant will perform a dividend-salary mix
calculation to determine the best way of withdrawing money
from the corporation.

Even though Canadian income tax laws are different from
other jurisdictions, some of the same principles of tax
planning will still apply.

In order to qualify for Canada Pension Plan (C.P.P.)
benefits or to make Registered Retirement Savings Plan
(R.R.S.P.) contributions, there must be some earned income.
This requires the payment of wages. In fact, many
accountants will make sure that their clients have maximized
their C.P.P. and R.R.S.P. contributions for the year in
order to ensure sufficient future retirement benefits, even
if it costs a little more in income tax and/or payroll taxes.

On the other hand, the Dividend Tax Credit reduces the tax
payable on dividends received from the corporation, since
the corporation has already been taxed on its income.
Therefore, the accountant may recommend that the corporation
pay some dividends.

Sometimes, if the owner doesn’t require the cash, the income
is simply retained inside the corporation and tax is paid at
the lower small business rate by the corporation. If the
corporation had income in excess of the Small Business
Deduction, it likely would pay it out in wages.

Depending on the circumstances of the taxpayer, wages may be
the least expensive way of taking money out of the corporation.
Sometimes, dividends are better. Generally, a mix of both is
required.

An accountant will have to balance many factors to come out
with the optimal mix for you. He will consider your family
situation, other income sources, losses, investment and
retirement objectives, et cetera. Keep in mind that the lowest
possible tax bill for the current year is not always in your
best interests.