Salary or dividends? The small-business owner's dilemma

When it comes to minimizing tax hits, the decision to take a salary or a dividend matters

Salary or dividends? The small-business owner's dilemma
As the year draws to a close and changes to small-business taxation are just around the corner, many Canadians with corporations are undoubtedly concerned with determining ways to optimize their tax plans. That involves a lot of decisions — including how to balance salary and dividends.

In its recently released compendium of year-end tax tips for 2017, public accounting firm Crowe Soberman noted the different ways salary and dividends can affect taxes for Canadians with their own corporation.

“Salary will qualify you and other family members active in the business for RRSP contributions, Canada Pension Plan (CPP) contributions, and child-care deductions,” the firm noted.

But while dividends are not eligible for those contributions or deductions, they may cost the family unit less in taxes. Each family member over 17 will pay little or no income tax on a maximum of $33,308 of non-eligible dividends, or a maximum of $51,635 of eligible dividends; however, a small Ontario Health Tax premium may apply to some.

“The tax on split income eliminates the tax benefits of paying dividends to children under 18 years of age,” the firm said. It added that 2017 may be the last year income can be split with family members who are not active in the family business, or fail other criteria in the “reasonableness test” that’s been proposed by the federal government.

The firm also suggested several possible ways funds from the corporation can be accessed tax-free. Those include:
  • Repaying shareholder loans;
  • Returning capital to shareholders up to the paid-up capital or the adjusted cost base of the shares, whichever is less; and
  • Rolling in personal assets with a high cost base to the corporation on a tax free-basis.

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