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Ask An Advisor: What's the difference between salary and dividends?

How to Know When it’s Time to Incorporate Your BusinessQ: In terms of remuneration for someone who is incorporated, what’s the difference between salary and dividends?

A: The major difference is how much you’ll pay in taxes. For personal corporations, income is the salary that the incorporated professional pays himself from his corporation. Unfortunately, in Canada the full amount of that salary is subject to the marginal tax rate of the individual.

Dividends can be paid to shareholders of the corporation, such as the incorporated professional, as a participation in the corporation’s after-tax profits. Dividends are taxed in a tax-preferred manner relative to salary. In situations where an individual has no or little other sources of income, it’s possible that up to $40K can be paid out without incurring personal income taxes if you pay yourself through dividends.

Ask An Advisor is a regular feature based on commonly asked questions I’ve received from clients. If you have a question, shoot me an email. I will write back and post your question in this series for the benefit of other readers. If you don’t want your question posted online, or wish to remain anonymous, let me know.