Maximizing Tax Savings with RRSP 

 As a business owner, you have the choice of either keeping extra profits within your corporation or withdrawing them to invest in a Registered Retirement Savings Plan (RRSP). To make an RRSP contribution, you need sufficient contribution room, which is 18% of your previous year’s salary income, up to a maximum of $30,780 in 2023. 

In most provinces and territories in 2023, the tax cost for business income is relatively low. However, there’s a distinction between Small Business Deduction (SBD) Income (active business income eligible for the SBD) and General Income (other income not eligible for the SBD). 

Choosing to pay taxes on dividends rather than salary generally results in a higher combined tax for the corporation and shareholder. The exception is in New Brunswick, where choosing dividends over salary can save 0.51% in taxes. 

For those with excess profits, investing in an RRSP might be more beneficial than keeping the funds in the corporation. However, sufficient RRSP contribution room is necessary. When distributing corporate income, you can choose between salary or dividend, each with different tax implications. 

With salary, the individual pays personal tax. For dividends, the corporation pays corporate tax on the income, and the individual pays personal tax on the dividends. The tax rates for corporate and personal income should be integrated to ensure equal taxation for both salary and dividends. 

An example is provided with Sera, a professional from Ontario. She has two options for distributing her corporation’s SBD Income: as salary (with RRSP contributions) or as dividends (with corporate investing). The article compares the outcomes of these two methods over 30 years, considering different types of income and investment returns. 

Other considerations include the impact of passive income or taxable capital on small business deductions, contributions to CPP/QPP, EI premiums, the Lifetime Capital Gains Exemption (LCGE), income splitting strategies with RRSPs and dividends, and the use of corporate life insurance. 

In conclusion, when deciding between a bonus vs. dividend in Canada, consider the tax implications and your specific circumstances. Consulting with a tax professional is recommended to navigate these choices effectively.