Dividends do not trigger CPP contributions or earn additional RRSP contribution space. These retirement savings vehicles would not be available to her if she were to compensate herself through dividends. If an owner-manager takes a salary from her company, she would be able to save for retirement as most Canadians do: via involuntary CPP and voluntary RRSP contributions. What’s more, the two-sided CPP contribution is not a trivial outlay for an owner-manager avoiding it can make dividends appealing from a cash flow standpoint. While paying into the CPP is not necessarily a bad thing, the fact that it is paid twice by owner-managers makes it a less appealing savings vehicle for this group than it is for typical employees. As both employee and employer, the owner-manager must pay both halves. In 2022, the combined employee/employer contribution to the CPP is calculated as 10.4% of the salary paid, to a maximum of $6,999.60 – half of which is paid by the employee, and half by the employer. The key tax difference between salaries and dividends is that salaries are subject to the CPP and dividends are not. The taxes on salaries, on the other hand, are only paid in the owner-manager’s hands (since salaries are derived from employment, they are deductible from corporate income). The taxes on dividends are paid in two places: first, in the corporation (since dividends are derived from ownership, they aren’t deductible from corporate income) and second, in the owner-manager’s hands. Canadian small business and personal tax rates were designed with this outcome in mind. There is almost no short term difference between the total tax paid as a result of a dividend and the total tax paid as a result of a salary. Salary – an employment return paid out of the corporation’s net income.Dividend – an investment return paid out of the corporation’s retained earnings.As the owner-manager of a Canadian small business corporation, you have two options when it comes to paying yourself:
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