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.

You and your company are unique. Let's talk and tailor a solution that is right for you.
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Visit our blog to review our 3-part detailed discussion of Wages or Dividends?

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