Is it better to take a dividend or salary?
The tax system is designed so that it should not matter how an individual earns their income as they should experience the same level of tax. What this means is that whether the income is earned through a company or directly by the individual, the tax paid will be the same.
The political reason for integration is to prevent setting up tax shelters to defer income by having the overall tax burden equal. It will not matter how the income is earned and therefore keep the money flowing in the economy, rather than stockpiling it.
Since the amount of tax ultimately paid on a dividend is the same as the amount of tax paid on a salary there is no reason to use dividends instead of salaries, the taxpayer must look at other criteria. Salaries attract CPP and EI while dividends do not. Salaries generate room for RRSP’s while dividends do not. Salary requires withholding taxes to be submitted regularly while dividends may only require installments quarterly. On the other hand dividends can be an effective tool for income splitting. Also the two step process can be used to help you time the second level of tax (z above) such that you have time to make more money in the corporation before declaring a dividend and/or you happen to be a lower tax bracket at the time you pay (z) then you were when you paid (y).
By The Gilmour Knotts
Chartered Accountants Team