If you consider ONLY the income tax (BC Personal tax and the Active Small Business Corporate tax rate), you should be indifferent what form your income takes – either salary or dividend. Our tax system is designed so that there is close integration of tax on these two sources. However, there are several other factors that should be considered when making the salary versus dividend decision including:
- RRSP Contribution Limit
- Income splitting
- Old Age Clawback
CPP contributions are NOT paid on dividends
Although the savings from not contributing to CPP can be quite substantial (the maximum contribution for 2010 is $2,163 each for the employee and employer), there are many other benefits to contributing to CPP. If you become disabled, you may be able to receive CPP disability benefits. If you die, your family may qualify for Survivor Benefits and your estate may receive the Death Benefit. At retirement, regardless of your personal savings, at least you should receive CPP. [The maximum pensionable earnings in 2010 is $47,200.]
EI premiums are NOT paid on dividends
A minimum shareholder investment is required to be exempt from Employment Insurance premiums on salary (more than 40%); however, the EI program has undergone revisions in 2010 allowing for self-employed individuals to voluntarily contribute. Special rules exist for certain family members working in the business.
RRSP Contribution Limit
RRSP contributions are calculated on earned income (salary); you must have earned income to increase your contribution room. (The maximum RRSP deduction limit for 2010 is $22,000, requiring earned income of $122,222 to max out.)
Generally wages paid to family members must be “reasonable for work performed”; whereas family members are not required to work in the business to receive a dividend. Special rules ,may apply to minor children.
Old Age Pension Clawback
The Old Age Pension Clawback will be lower if salaries are paid. [The Old Age Pension Clawback commences when net income exceeds the base rate – $66,733 for 2010.]
Disability insurance – Many private insurers do not consider dividends to be income for the purposes of obtaining disability insurance.
Personal tax remittance – May not be required at the time the dividend is paid.
WCB – May not be required on dividends.
The advantages/disadvantages of each issue should be taken into consideration before a final decision is made. Plan to review this important tax planning tool annually during the fiscal year-end process.
A great time to review your tax plan is in advance of year end. Plan to come in during your fourth quarter.
If you would like Skidmore & Co CGA to be part of your financial management team, give the office a call. We are currently growing our corporate client base with clients looking for a full-service accounting firm.