TAX TIPS
CPP - Salary or Dividend
This month’s topic is of particular interest to majority shareholders of Canadian Controlled Private Corporations (CCPCs). It might also be of interest to the self-employed (or those about to create a new business) who are wondering whether to incorporate or not.
In general terms, Canada’s tax laws work to make one indifferent about receiving remuneration by way of salary or dividend. With dividends, the corporation has to first pay tax on its income and then pay out the dividend from retained earnings. Due to dividend tax credits, an individual can receive just over $40,000 in dividend income without having to pay personal income tax. With salary, the salary is a pre-tax expense that reduces taxable income in the corporation but the recipient individual pays tax on the income. The total income tax Ottawa receives is approximately identical whichever way the small business owner chooses to pay herself.
Where an individual can save money is by deciding to NOT pay CPP. To make this decision one has to first contact Service Canada - 1-800-277-9914 - to get a CPP pension benefit estimate. The maximum monthly payment you can receive from CPP at the present time is $960 per month. The average actual being paid right now is $512 per month. The reason for calling for an estimate is to find out what your own CPP pension payout is likely to be provided nothing changes between now and retirement date. Service Canada will provide you with an estimate of what you will get when you choose to retire. (Previous articles dealt with making a decision on taking CPP early). You do not pay CPP on dividend income. Also, if you already elected to take CPP early and still operate a corporation you are CPP exempt and no added benefit can accrue to you from taking dividends. NOTE: If you are only taking a small income from your corporation it may be beneficial to continue paying yourself a salary as you may be eligible for the Working Income Tax Benefit and you would lose this by taking your income by dividend. The next step is to ask Service Canada what your pension will be if you STOP making contributions today. You may be in for a shock. If you are at, near or over 50, you might find that the additional contributions that you would make if you continued to pay yourself by way of salary make very little difference to the amount of CPP pension you receive. You might well be better of putting this money into a Tax Free Savings Account and taking your remuneration by way of dividend. If the only income you have is from your own company and you pay yourself by dividend, RRSPs do not work for you as dividends are not considered ``Earned Income``.
This really hits home when you consider that as a small business owner of a corporation, you pay CPP twice! The maximum CPP contribution (based on only $43,700 of income) per year per employee is $2,163.15. You pay this as the employee and then your corporation has to pay this again for the employer`s portion. Say you intend to continue to operate your corporation for another ten years. Based on today`s numbers, that is $43,263 you will be paying to Ottawa. You can easily work out how much your CPP Pension would have to increase per month to have any chance of making this sum back before interest on the principal. So check it out and make an informed decision. This is even more important if you pay your spouse remuneration from your corporation also.
Self-employed individuals do pay CPP on self-employed earnings. They have to complete a Schedule 8 to the T1 return and remit the CPP if there is a balance owing. If there is a refund, the CPP owing will be deducted from the refund. If you are self-employed you cannot pay yourself dividends and cannot avoid paying CPP.
For retired persons generally that have bothered reading this far (and for the benefit of seniors you may know) REMEMBER there is also the GIS. Many seniors do not know about or forget to apply for the GIS. Persons over 65 are not limited to CPP and OAS. The guaranteed income supplement is currently only based on income and NOT assets. If you are reliant on CPP and OAS for your retirement income you may well qualify for GIS –so apply and find out.
Ian Hawkins owns Mount Albert Tax Company – located next to the Post Office in Mount Albert
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