Salary vs Dividend Overview 

The article from GYTD CPA discusses the two primary methods through which a shareholder of a corporation can access income generated by the business: salary and dividends. Here’s a rewritten summary: 

Understanding Salary and Dividend Options for Corporate Shareholders 

Corporate shareholders who are also involved in running the business have two main avenues for income: receiving a salary as an employee or obtaining dividends as a shareholder. Each method has its unique implications and benefits. 

• Salary as Employee-Shareholder: 
• When a salary is paid, it’s deductible for the corporation, reducing its taxable profits. 
• The salary is included in the employee-shareholder’s income and is subject to various withholdings like CPP/QPP, EI (sometimes exempt), and income tax. 
• The corporation also bears additional costs like its share of CPP/QPP and other taxes. 
• A key advantage for the employee-shareholder is the accumulation of RRSP room, allowing for tax deferral on some income. 

• Dividends to Shareholders: 
• Dividends are paid from the corporation’s retained earnings and are not deductible for corporate income tax purposes. 
• Shareholders must perform a gross-up and credit calculation for tax purposes. 
• The gross-up represents the pre-tax value of the dividend, while the tax credit accounts for corporate taxes already paid. 
• Dividends are classified as either eligible or non-eligible, affecting the tax calculations. 
• Certain dividends, like capital dividends, can be tax-free, while stock dividends might defer taxes or increase ownership in the corporation. 

The choice between salary and dividends involves various factors, including tax implications for both the shareholder and the corporation. Non-tax considerations, such as protection from CRA actions, also play a role. It’s advisable to consult a tax accountant to determine the most beneficial structure for owner/manager remuneration.