For unincorporated businesses, the Canada Revenue Agency doesn’t tax your net income, or profit, and there aren’t deductions when you pull money from the business to pay yourself. When you’re a Canadian small business owner and file as a corporation, there are a few options for how you can get paid: a salary, dividends, or a mix of the two. How you decide to pay yourself is up to you, but it’s best to know some of the advantages and disadvantages to each payment option.
Contribute Toward Retirement: RRSP and CPP
Paying yourself a salary has a few benefits when it comes to your retirement savings. Automatic contributions for retirement savings are ideal for people who don’t have a regular financial planner or who have a difficult time saving for retirement on their own. Because you are making an income, depending on your age, you’re allowed to contribute to a Registered Retirement Savings Plan, or RRSP. This is usually an option that is best for people in higher tax brackets because it means they will have higher tax savings. There are other options, such as a Tax Free Savings Account, for owners who earn a smaller income. And because an RRSP is pulled from your income, it reduces the amount of your income that is taxable, and you are not taxed until you withdraw funds from the account. When you pay yourself a salary, you also contribute toward the Canadian Pension Plan, or CPP. This requirement is beneficial in the long run when you get ready to retire or if you become disabled. It provides a monthly pension dependent on how much and how long you contributed to the CPP.
Paying a Salary Can Help You Budget
Once you determine how much to pay yourself, you know how much to regularly expect, and it’s easier to create a personal budget. Using a balance sheet, you can better manage and ensure you’ll have enough to cover all your monthly expenses. Having this monthly income is also important when you’re trying to get a mortgage for a home; it can become a complex and difficult process with a dividend since dividends don’t count toward earned income.
Your Salary Is a Business Tax Deduction
When you pay yourself a salary, the salary becomes a deduction for your small business corporation, although you are taxed personally on the income you receive. Dividends are paid out from the after-tax income of your business. If you have young children, having a salary also allows you to deduct child care, which is not the case for the dividend alternative. Because of all of the intricacies involved with the various ways you can pay yourself, it’s a decision that deserves careful consideration. It might be a good idea to consult with a tax professional to learn what’s best for you and your business.