Salary vs Dividend – Tax Planning Post 2024 Federal Budget

For CCPCs who have managed to survive and thrive the last 8 years of tax punishment and Covid disruptions, what to do after the 2024 proposed tax rules changes?

Dividends vs Payroll

Prior to 2016, remuneration to shareholders using dividends was the more tax advantageous option. Dividends did not require CPP premiums to be paid by the employer and the employee (which is the same person for many CCPC). Also, the tax structure at that time resulted in dividends taxed slightly favorably.

In the present 2024, the tax rates applied on CCPC dividends have crept up that even the CPP premiums saved is offset by the higher income tax.

My conclusion is payroll is the better remuneration method currently despite the much higher CPP premiums. If the dividend is attracting more income taxes, we might as well pay the CPP and receive the CPP benefits in our old age. In addition, payroll creates RRSP room which the individual can contribute into and use as a deduction.

Investing in RRSP vs CCPC or Holdco

How about investing in the RRSP account vs investing in the CCPC or the Holdco? This choice is a more complicated analysis and discussion. The downside to the wonderful RRSP vehicle has been that the capital gains inside the account, when withdrawn, will be fully taxable whereas capital gains in an unregistered personal or corporate account is 50% taxable. However, unregistered account gains are taxed when the asset is sold whereas no such taxation occurs in an RRSP. It is a long-term math race but those who have steadfastly contributed to the RRSP and have been extremely successful with investments find it frustrating that access to the RRSP funds come with big tax consequences. Many of those who have a large nest egg in their RRSP account but would like to make a draw to assist their adult children buy a house are finding that CRA would take a big bite out of this RRSP draw first.

The April 2024 budget proposes to tax capital gains earned in a CCPC at an inclusion rate of 66.67 percent, an increase from the existing 50 percent inclusion rate. This is essentially a 33.33% increase in taxes for capital gains earned in a corporation. In addition, my guess is the CDA that can be extracted tax free will reduce from the current 50% of the gains to 33.33% of the gains that remains tax free.

Given Canada’s perennial deficit, it is possible that the capital gains inclusion rate could increase further to 75 percent or more. If this is the case, investing in the RRSP would be more favorable than investing funds in the CCPC. Another case to create RRSP room by remunerating using the payroll method.

Vancouver Tax Planning Services – Mew & Company

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