The third instalment of our series on the benefits of incorporating covers the ability to pay yourself in dividends. If you are shareholder and work for the corporation, you can pay yourself a combination of dividends and wages. The first two videos covered incorporating when you’re taking on large debt and incorporating when your business is expanding. Be sure to check those out if you’re interested in more information on this topic!
As many people know, dividends are taxed at a lower rate than wages. Because of this, many corporation owners immediately want to pay themselves dividends. But, there are some other things to keep in mind before deciding on the best payment option!
What to Keep in Mind
If you choose to pay yourself strictly in dividends, you do lose out on a few things. For one, you will not be contributing to CPP. You also will not create any RRSP room. Since these are both important retirement funds for many people, you’ll want to consider this when retirement planning. You might fund it to be a good idea to pay yourself a combination of both dividends and wages. This can allow you to save on taxes as much as possible, while also leaving these retirement options in place.
Another thing to keep in mind is that dividends are paid with after tax dollars. Therefore, your corporation is paying tax on this money before it is paid out to you. A good method would be to calculate the total personal tax you would pay plus the total corporate tax you would pay at different wage/dividend payouts. Then, you can select the one that works best for you overall.
There are a few other things to keep in mind when it comes to paying yourself dividends as a shareholder in your corporation. We go over everything in this video, so check it out for more information! Be sure to subscribe to our YouTube channel for weekly videos with tax tips, business/finance information, current events in the business world, and more!