Determining how—and how much—to pay yourself is a difficult decision for any private business owner. Should your company pay you a salary, eligible dividends, non-eligible dividends—or perhaps a combination? Well, the answer is: it depends.
The goal of any remuneration strategy is typically to keep as much money in your pocket as possible. To do that effectively, you should not only consider your company’s tax structure, your income level and cash flow needs, your personal eligibility for certain income tax deductions and your age, but you may want to keep a close eye on national and provincial tax rates as well.
Because tax brackets and rates change regularly, your remuneration strategy should be fluid. For example, if you own a private business in Alberta, the remuneration strategy you employed a few years ago, when the top personal income tax rate was 39 percent, is likely quite different than the one you would employ today when the top marginal rate is 48 percent.
Do you pay yourself in salary or dividends, or a combination of both? In Alberta, salary on personal income tax levels above $300,000 is approximately two percent more effective than dividends. So, now may be the time to consider doing something different.
In the same sense, recent changes to the small business deduction are likely causing professionals that may no longer be eligible—such as doctors and lawyers—to review their remuneration approach.
To remain on top of these shifts, you should consider sitting down with your tax professional, ideally semi-annually, identifying any changes that might impact your business and exploring different options for providing tax relief. These could include:
Taking a closer look at your cash flow needs
How much income do you really need? If possible, it may make sense to leave a little bit more money in the company this year and withdraw it at a later date. This is typically done if that extra money is going to put you into a higher personal tax bracket. Often, it can be invested in the company and deferred until retirement, when your tax bracket is lower.
Comparing the tax treatment of salary vs dividends
In 2016, the tax rate for non-eligible dividends in Ontario increased by five percentage points over the previous year, to 45.3 percent. That may sound like a lot—until you consider that the tax rate for personal income over $220,000 rose by four percentage points in that same timeframe, to 53.5 percent. To truly determine what’s best for you, it’s consequently important to look at the entire picture. 1
Maximize income splitting
As a private business owner, with the right share structure, you may be able to split your income (either salaries or dividends) between your spouse, adult children and /or beneficiaries of a family trust—and ultimately pay less tax as a family by doing so.
So, for example, if you and your spouse require $300,000 per year for personal lifestyle needs, each of you can declare an annual income of $150,000 and be taxed at a more reasonable rate. Alternatively, if you’re currently paying for your adult children to attend university, rather than taking the money yourself and paying personal tax on it at your marginal rates, your corporation can pay them in non-eligible dividends that will be taxed at their lower marginal tax bracket. 2
As mentioned previously, every business owner’s situation is different. The feasibility of these tax deferral options—and your overall remuneration strategy—will depend on your specific situation and tax environment.