Congratulations! You’ve started your own small business. When do you get paid?
Running a sole proprietorship, you must include all your income on your annual income taxes. It’s a lot easier than when you decide to incorporate (a lengthy pro-con topic in and of itself). As a corporation you must decide whether to pay yourself a salary or in dividends, or both. So how do you decide? Let’s take a look at the pros and cons of each method.
The better question is HOW do you pay yourself?
Dividends
Dividends are more flexible in terms of payment options because you aren’t required to make CPP or mandatory retirement contributions. They are much simpler in the sense that there are no source deductions and they also offer greater cash flow for the business. Dividends are also taxed at a lower rate than salary.
Although this all sounds great, dividends do not count as salary when you apply for loans. This is an issue if you need a loan of any sort, including for a mortgage, car or renovation. RRSP thresholds are also not increased when a business owner takes only dividends.
Salary
It seems on the surface so much more expensive. It’s taxed at a higher rate than dividends, you need to go through the process of setting up a payroll account with the CRA and it limits your business’s cash flow. Some industries are also required to pay additional source deductions for employees, such as construction.
Despite these drawbacks, paying yourself a salary does mean that you will be forced to contribute to your retirement savings through CPP, your RRSP threshold increases and loan applications are much easier. Payroll also comes with expenses, another deductible on your coporate income taxes.
So both have good and bad, but sometimes a combination of the two works best. A tax expert would be able to guide you with regards to the best ways to set up your income methods.
And experts are also tax deductible!
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