Paying Yourself: Salaries vs. Dividends – Part Two - PowerPoint PPT Presentation

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Paying Yourself: Salaries vs. Dividends – Part Two

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Today’s blog is the second of a two part series on paying yourself as a Small Business Owner — should you pay yourself a salary or in dividends? – PowerPoint PPT presentation

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Title: Paying Yourself: Salaries vs. Dividends – Part Two


1
Paying Yourself Salaries vs. Dividends Part Two
2
  • The Pros and Cons of Salaries
  • Todays blog is the second of a two part series
    on paying yourself as a Small Business Owner
    should you pay yourself a salary or in dividends?
  • In part one of this two-part blog, I examined the
    benefits and drawbacks of compensating yourself
    with a salary this second analysis will provide
    a breakdown of dividends. Click here to read part
    one!
  • So what are the ins-and-outs when, as a small
    business owner, you decide to pay yourself via
    dividend? Here are some of the pros

3
  • Its simple when you need money, just write
    yourself a cheque. There are no source
    deductions to make and no reports to send to the
    government.
  • Lowest tax in the short term with dividends, you
    do not pay into the Canadian Pension Plan (CPP).
    CPP contributions in 2017 are 2,564 for the
    employee and an additional 2,564 matched by your
    employer (i.e. your company), so your annual tax
    savings here is 5,128a nice little weekend get
    away!
  • Depending on how you think about CPP, this can be
    a good thing or a bad thing. Generally speaking,
    if you dont pay into the CPP program, you dont
    get any pay outs once you retire.

4
  • Some folks think that CPP wont be around when
    they retire in 30 years, so they dont want to
    pay into it. Our opinion is that CPP is here to
    stay and provides a good safety net if your
    business unexpectedly fails. Paying 5,128 per
    year into an investment portfolio for 45 years
    (the average working life of a person) and then
    being entitled to receive roughly 1,200 per
    month until you pass away is a very reasonable
    return on your investment. Are you sure that you
    can do better than this investing the money
    yourself? Not paying CCP premiums is the primary
    reason that the tax rate differs between salaries
    and dividends. When CPP is ignored, the tax rate
    is nearly equivalent between salaries vs.
    dividends.

5
  • You can pay inactive persons income splitting is
    a powerful tax management strategy. Currently,
    you can pay shareholders (i.e. your spouse, your
    brother, anyone that owns shares in your company)
    a dividend even if they dont provide any
    services to your company. This allows you to
    direct income to lower income earning people and
    save a significant amount of tax. Note, our
    liberal government is currently working to end
    this benefit.
  • Flexibility we can easily change how much income
    we declare to you by having you repay any excess
    monies you withdrew from the company. This can
    be helpful to manage your income tax rate in any
    given year.

6
  • There is always a downside. Here are some of the
    cons associated with dividends
  • Surprise tax bills depending on how much you
    withdraw from the company, you may have a tax
    bill the following April. Your taxes could be as
    little as 0 or as high as 50it all depends on
    how much you withdraw. MAKE SURE you talk with a
    qualified accountant before withdrawing more than
    50,000 from your business. Clients and
    accountants both hate surprise tax bills.
  • RRSPs you will not have access to the RRSP
    program. RRSPs are super importantin our
    opinion they are one of the best tax deductions
    available. We wrote a whole blog just on them for
    that reason (read it here).

7
  • Higher tax rate in the long term generally
    speaking, you will end up paying more tax in the
    long run if you utilize dividends consistently
    over your lifetime, primarily due to the RRSP
    component described above. Please note that this
    depends on your personal tax circumstances and is
    not a universal truth.
  • Summing it all up, we generally take a mixed
    approach to the salary vs. dividend question.
    This way we get the benefits from both salaries
    and dividends, while minimizing the downside.
    While we would love to give you some specific
    instructions here, the right answer for you
    really depends on how much money youre going to
    need over the long term from your business.

8
  • Are you wondering what the best combination is
    for you? We offer everyone a free hour to discuss
    any questions that you may have. Contact us here.
  • Kent Accounting is a full service accounting firm
    located in Calgary, Alberta. The firm is lead by
    Kent Greaves, a Chartered Professional Accountant
    in Calgary with over 18 years of experience
    working with privately owned companies. Our small
    business accountants in Calgary believe in
    prompt, accurate service at affordable rates.
    Running a small business can be the most exciting
    endeavor and the greatest challenge a person can
    undertake were here to help you succeed.
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