Best Tax Preparation Services in Stratford, ON

Corporate Salary versus Dividends The decision to take a salary or dividends involves an understanding of corporate and personal tax integration. If an owner-manager pays out all their corporate income as salary, it would be similar to if they earned it all personally in the first place. The corporation would claim a tax deduction for the income paid out, so the corporation would have no taxable income, and the employee would pay tax on the income instead. Dividends are a bit different. A dividend is a payment of after-tax profit to a shareholder. A small-business corporation typically pays between eight per cent and 16 per cent tax on its income. It can then pay a dividend to a shareholder that is taxed at a lower rate than salary, generally about the same eight per cent to 16 per cent lower, but the rate differential can be less or more depending on a taxpayer’s income, deductions and credits. It is possible for a new business to not pay out income to employees and/or shareholders in its early days, especially when starting up or before becoming profitable. Since paying salary involves registering a payroll account with the Canada Revenue Agency and remitting CPP contributions and income tax to the CRA, it can be more complex for new business owners. Dividends can be simpler since the corporation can pay them out without having to worry about withholding tax and government remittances. The drawback is you could end up spending money that has not had tax deducted.