There are two ways you can pay yourself from your corporation.

Option #1 - Salary

Advantages of Paying Yourself a Salary

Receive legally recognizable personal income.
Steady & predictable income throughout the year by setting yourself up for the same payments each pay period.
Allow you to contribute to the Canada Pension Plan with benefits in the future when CPP is collected when you retire.
Besides paying yourself, you can do some income-splitting by paying a reasonable salary to related employees such as a spouse.
Fewer surprise tax bills since you have regular payroll deductions (no more tax installments or having a big tax bill at the end of the year…you might even get a refund!).
Easier to save for retirement through RRSP contributions
- Only employment income is included for the 18% increase in RRSP contribution room each year.
Easier to apply for bank loans and mortgages because you have a record of consistent income.
The corporation takes a tax deduction for the amount of salary paid to you.
You can pay out salaries to ensure a corporation doesn’t earn over $500,000, which allows it to pay income tax at a much lower rate than it would on income over $500,000.

Drawbacks of Paying Yourself a Salary

You must register a payroll account with CRA.
You must also remit monthly payroll deductions to CRA, subject to fines/penalties/interest if not paid.
Depending on your point of view, CPP contributions can be considered a cost for you and the corporation. You make the payments now to get benefits after you retire.
You have to file a T4 annually for all employees.
- Suppose you have multiple employees (office staff). In that case, these drawbacks will be set up regardless, but if you are the corporation’s only employee, you can avoid this if you choose only to pay yourself dividends.

Option #2 - Dividends

Advantages of Paying Yourself Dividends

It’s the simplest way to pay yourself; no additional withholding taxes or payroll account needed with CRA.
Dividends can be declared at any time, allowing you to optimize your tax situation.
Annual T5 filing only is very simple, and there are no monthly filings creating less chance for payroll penaltieswhich can be significant).
Avoid mandatory retirement contributions to CPP.
Less personal tax paid than salaries (though overall tax should be the same, see next video!).

Drawbacks of Paying Yourself Dividends

Dividends are issued and paid based on share ownership. It can be tricky if multiple shareholders have different tax situations, resulting in different needs for amount and timing of payments.
Dividend income does not increase your RRSP contribution room
- This is a missed tax shelter!
- With no opportunity to contribute to your RRSP, you also miss out on the benefits of participating in the Home Buyer’s Plan and Lifelong Learning Plan.
Not having a withholding tax on dividends means that you will have a large tax bill at the end of the year.
- Make sure you save for this throughout the year.
- If you are not good at saving for your annual tax bill, salary is forced savings through payroll deductions.
Without CPP and RRSP contributions, you will have to be more active and cognizant in planning for your retirement.
Receiving dividends instead of a salary prevents you from claiming certain personal income tax deductions such as childcare costs.

So, What Should You Pay Yourself?

The most important difference is that salaries are an expense to the corporation and reduce corporate taxes but are taxed at 100% on your personal tax return.

On the other hand, dividends are not considered a company expense and will not lower the corporation’s overall taxable income.

Dividends are paid from a corporation’s after-tax profits, meaning that the corporation would have already paid corporate income tax on that income.
On the personal tax side, dividends are taxed at a lower rate than salary, resulting in less personal tax.

Ultimately, the correct decision for you comes down to personal circumstances.

Not sure which option is best for you? The Tyagi Group Business Structure Online Course will teach you everything you need to know about incorporating and paying yourself from a corporation as a health professional so you can understand income tax requirements and save money! Click here to register now.

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