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Wages vs. Dividends: Summary
Last Updated: August 24, 2022Print Version (PDF)
| Wages | Dividends |
|---|---|
| Basis of Payment | |
| Wages are paid to employees for work done for corporation. | Dividends are an allocation of corporate profits based on the number of shares owned. |
| Must the Individual be Active in the Corporation? | |
| Yes, the recipient must be actively earning the income received from the corporation. | No, the recipient can be inactive in the corporation. However, new tax rules called "Tax On Split Income" - "TOSI" limits this option. |
| Tax Treatment - Corporation | |
| Deduction as corporate expense. | Dividends are a reduction of company equity |
| Monthly payroll remittance required | No remittance required |
| Tax savings starting at 11% | No tax savings to the corporation. |
| Tax Treatment - Personal | Fully taxed at individuals marginal tax rate. | Grossed up to mirror taxation of wages with a tax credit provided to represent the taxes paid on that money in the corporation. |
| Tax credits on personal return | |
| Qualifies for a non-refundable employment tax credit | Qualifies for a dividend tax credit (lower tax rates than wages) |
| Deductions allowable | |
| Employment expenses and/or child care expense deduction can be available | Interest & carrying charges can be deducted against this income |
| Personal Instalment requirements | |
| No instalments required | Quarterly instalments likely |
| Tax Treatment - Overall | |
| No tax in the corporation and all taxed at the individuals marginal tax rate | Tax paid both corporately & personally on this money Designed to be tax neutral with wages at higher levels of income but this varies by province |
| Provide contributions to CPP retirement benefits | |
| With the corporation's matching of CPP the remittance for CPP the CPP paid is over 10% of the wages | No CPP contributions Need to save extra for retirement |
| Adds to RRSP contribution limits | |
| Yes, 18% of wages, to the annual maximum, adds to the individual's overall RRSP contribution limit | No effect on the RRSP contribution limit |
| Are amounts paid restricted or limited | |
| Wages paid to related individuals, such as spouse or children, are subject to reasonability tests | Dividends are generally limited to the profits earned by the corporation. The new TOSI rules can restrict dividends received by some individuals. |
| Cash Flow | |
| Helps manage cash flow as taxes are being paid monthly Con - need to pay taxes monthly | No deduction in corporation and no remittances on personal taxes can often lead to surprise tax bills both on the corporate and personal taxes |
| Financing | |
| Banks tend to favor employment income (wages or salary) | Dividends often fluctuate and are discretionary, as such, the banks are less comfortable with this source of income |
| Filing Requirements | |
| Monthly remittance report accompanies the monthly remittance Annual T4 slips and supplementary | No monthly filings required Annual T5 slips & supplementary |
| Director Liability | |
| Shareholder wages are ok - no risk if wages are reasonable | Any dividends to shareholders can put personal assets at risk |
| Summary | |
| There are advantages to both. Shareholders of corporations would be advised to take both wages & dividends every year. How much of each depends on you and your circumstances. | |
| The above comparison is only a summary of some key differences between wages & dividends along with a very brief discussion about the tax treatment of each. No decisions should be made on based on the above without a detailed discussion with one of our tax professionals. Please give us a call to arrange an appointment to review your needs and goals in order to best determine a financial plan that will work for you. | |
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