Blogs & Comment

Dividends or salary if incorporated? (II)

When deciding the salary/dividend mix to take when incorporated, there are other factors to consider in addition to those mentioned in the previous post. Time and space constraints prevent exploring them all, but some of the more notable ones can be reviewed here.
Probably the most important of the additional factors is diversification. Taking salary and making RRSP contributions has the extra advantage of greater diversification. Wealth is not concentrated just in the business but is also spread over financial assets in the RRSP.
Christine Van Cauwenberghe adds (in Wealth Planning Strategies for Canadians 2010) that if you receive income in the form of dividends, you will not be able to make CPP contributions and claim CPP when you retire. And as disability insurance payments are usually based on salary, taking a small salary could entail a small benefit in the event a disability occurs.
Evelyn Jacks discusses another wrinkle in Make Sure its Deductible(4th ed). In the case of eligible dividends, the dividend gross-up could inflate net income (reported on Line 236 of the return) to the point where it adversely affects the deductions and tax credits calculated on the basis of the net income figure . As well, you may find that the grossed-up dividend will artificially increase other provincial taxes in the form of user fees, expenditures like nursing home per diem rates [and so on]. The dividend gross-up rate was 45% in 2009 and is slated to decline to 38% after 2011.
Note that there are also ineligible dividends, which are dividends paid from profits subject to the small business deduction. The gross-up rates for them were 25% in 2009 and will remain at 25% after 2011. Its important to consider whether to create a bonus to keep corporate profits under this small business deduction level , advises Ms. Jacks.
The information above is offered on an interpretation basis only. Be sure to consult a tax specialistbefore taking any steps.