Salary vs Dividend Calculator for Canadian Business Owners

Why Use This Calculator?

Understanding whether to take a salary or dividends can significantly impact your tax liability as a Canadian small business owner. Our calculator helps you make an informed decision on how to pay yourself.

This calculator aims to illustrate the concept of Integration

In Canadian tax law, the concept of integration ensures that income earned by a corporation and subsequently distributed to its shareholders as dividends is taxed at approximately the same overall rate as if the income had been earned directly by the individual, thereby avoiding double taxation.

As you alter your dividend vs salary mix, the 'After-tax income + CPP/EI' value changes, but not by much. This demonstrates tax integration at work! The total benefit to the individual whether paid by dividend or salary isn't that different.

What are the assumptions and limitations of this calculator?

• Canadian Controlled Private Corporations
• Max revenue $500,000
• Overly simplified expenses, just tax, dividend and salary
• Basic personal amounts and low-income tax exemptions are not used in this calculator.
• Payroll insurance not included in calculations

Comparing Salary vs Dividends for self-employed individuals

When choosing between salary and dividend compensation, it's important to consider the advantages and disadvantages of each option. Salaries can provide structured benefits and retirement savings opportunities, while dividends offer flexibility and potential tax savings. Below is a comparison of the pros and cons of each method:

Salary

Pros:

• CPP Contributions: Salaries require contributions to the Canada Pension Plan (CPP), which can provide future retirement benefits.
• RRSP Contribution Room: Salary income creates contribution room for Registered Retirement Savings Plans (RRSPs), allowing for further tax-sheltered retirement savings.
• Employee Benefits: Eligibility for various employee benefits, including Employment Insurance (EI) and work-related insurance coverage. Note: Self-employed individuals need to opt-in to EI, and different rules apply.

Cons:

• Payroll Taxes: Employers must pay additional payroll taxes, such as CPP and EI contributions, which can increase the overall cost of salaries.
• Administrative Burden: Processing payroll involves more administrative work, including regular remittances to the CRA and issuance of T4 slips.

Dividend

Pros:

• No CPP Contributions: Dividends do not require CPP contributions, reducing the total amount of tax paid.
• Flexibility: Dividends can be declared and paid out at the discretion of the business owner, providing flexibility in cash flow management.
• Simplicity: Issuing dividends involves less administrative work compared to managing payroll.

Cons:

• No CPP Benefits: Without CPP contributions, the individual may receive lower CPP benefits upon retirement.
• RRSP Contribution Room: Dividend income does not generate RRSP contribution room, potentially limiting future tax-sheltered retirement savings.

Definitions

• CPP: Canada Pension Plan - A social insurance program that provides income security to Canadians in retirement, disability, or death.
• EI: Employment Insurance - A federal program that provides temporary financial assistance to unemployed workers who have lost their job through no fault of their own.
• Self-Employed: Individuals who work for themselves rather than for an employer. They are responsible for managing their own business activities and finances.
• After-Tax Income: The amount of income an individual or entity receives after taxes have been deducted.
• RRSP: Registered Retirement Savings Plan - A tax-advantaged savings account designed to help Canadians save for retirement.
• Salary: Salary is a payment given by an employer to an employee in exchange for the work performed.
• Dividend: A distribution of a portion of a company's earnings to its shareholders, usually in the form of cash.