Tax Treatment of Testamentary Trusts
If you or your limited company own and operate your business, it is important to determine the best way for you to get money out of your corporation. Whether you’re declaring dividends or paying yourself a salary, both personal and corporate tax consequences should be considered. The result of your decision may have long lasting effects and the decision should be considered as part of your retirement plan.
I recently attended a presentation in which a couple accountants discussed some of the costs and benefits of earning a salary vs. dividend income. So, which one is better?
The answer… IT DEPENDS.
By declaring DIVIDENDS, you may be able to avoid the hassle of dealing with payroll or having to contribute to CPP or EI. Your income may also be subject to a lower overall tax rate, as dividend income is taxed differently than a salary. With dividends, you are free to determine the amount of the dividend and when it will be payable.
In paying out a SALARY, you create more contribution room in your RRSPs as you “earn” more income. You may also wish to earn a salary to ensure that you are contributing, at least minimally, to CPP so that you are entitled to receive CPP disability benefits in the event that you become disabled.
There may also be other advantages and disadvantages depending on your circumstances. The important thing to do is to consult a professional tax advisor to ensure you are making an informed decision as to which form of income is best suited for your circumstances and future plans.