Salary or Dividend? Shareholder Remuneration Revisited 2021

Recently, I decided to crunch some tax numbers for shareholders of a CCPC who are hoping to increase their take home pay in order to get into the BC real estate market.  Canadian taxpayers know that the tax rates in recent years have crept up.  What is commonly less known is that the tax rules and rates pertaining to dividends received from a CCPC have also shifted in recent years that a detailed analysis based on current rates and rules would be worth revisiting.

How CCPC Dividends Works

A few years back, receiving dividends from a CCPC as opposed to getting a management salary was the more favored remuneration method.  At that time, the corporate tax rate was higher but the corporation paid this tax anyways and bear the full burden of the cash outflow.  The personal tax rates on CCPC dividends were favorable and not to mention, there was no CPP withholdings on dividends.  Hence, the after-tax take home pay of a dividend from CCPC was superior to management salary.

Fast forward 6 years and I am no longer convinced that the answer is the same.  In BC, the combined corporate tax rate for a CCPC has decreased to 11 percent for a CCPC and 27 percent for a CCPC whose taxable income exceeds the small business deduction limit of $ 500,000.  However, very complex set to rules to limit the amount of investment income earned by a CCPC was implemented in 2018.  These complex rules, in conjunction with higher personal tax rates applied to CCPC dividends have combined to revisit the better remuneration debate.

What About Management Salary

Management salary, unlike dividends, is a deductible expense in the calculation of taxable corporate income.  Hence, by choosing the management salary method, the corporation is lowering its corporate taxes.  However, CPP premiums are applied on management salary, maxing out at $ 3,167 for the employer and $ 3,167 for the employee for the 2021 calendar year.  Hence, there is an added payroll tax cost of $ 6,334 combined on choosing the management salary.  (Do note that CPP is a long-term investment vehicle for the employee where there will be an annuity for the contributor starting at age 65.)  However, at the personal tax level, taxes on salary have not increased as much as taxes on CCPC dividends – the first advantage.  The second advantage is that salary produces RRSP contribution room where as CCPC dividend does not.  The taxpayer receiving management salary can buy RRSP to reduce personal taxes – an option not available for the CCPC dividend recipient.  As most taxpayers are aware, RRSP is a great vehicle for tax shelter.

RRSP Contributions

I was speaking to an investment advisor recently and he informed me that RRSP contributions have decreased dramatically in recent years.  I am not sure of all the reasons for the lack of popularity.  I have been advising many clients during the past years that capital gains earned outside of an RRSP are only 50 percent taxable whereas draws from an RRSP are 100 percent taxable.  This advice was used in assisting clients to choose between investing using a TFSA, a holding company, an RRSP, or personally.  However, with all the whispers of the capital gains inclusion rate going back up to 66.66 or even 75 percent, RRSP will become very relevant again. 

In addition, with the complex rules implemented during 2018 on adjusted aggregate investment income earned by a CCPC, paying a salary to the shareholder/manager is a method the CCPC may have to use to avoid the 27 percent corporate tax bracket. 

If you have been remunerating yourself with dividends from your corporation, now is the time to rethink if this strategy is still optimal.

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