How does corporate taxation for owner-managers work?

The income tax act attempts to ensure that if an individual earns income directly vs. using a corporation that the tax paid will be the same. On $100K of income this is true to within $1,000. Here is how it works.

If a corporation has $100K of taxable income before the owner is paid – there are two options:

First, the owner can take a $100K salary and pay the 25% or $25,000 of tax directly.

Alternatively, the corporation pays 14% or $14,000 of tax first. Then, when the after tax cash of $86,000 [$100K - $14K of tax] is removed by a dividend, the owner pays the other 12% or $12,000. The total tax cost is 26% or $26,000 [$14,000 + $12,000]. In this scenario, there is an advantage of about $1,000 if you take a salary.

In general, the Act aims to create indifference towards taking a salary or a dividend; however, each situation should be calculated.

Apart from taxes, are there other considerations when deciding to pay a salary vs. a dividend?

Yes, there are many significant circumstances and future outcomes to consider when paying a salary vs. a dividend. For example, eligibility for the CPP. Call us, we can help to ensure that you make the correct decision.

 © - Jacob Rawski, 2015

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