Salary vs Dividends Decision 

Key points from the blog include: 

• Tax Efficiency and Audit Risk: The decision between paying a salary or dividends is complex and depends on various factors, including personal and family circumstances, the corporation’s income source, and its legal structure. 

• Salary Payments: When a corporation pays salaries, it can deduct these from its income for tax purposes. However, it must also withhold taxes and possibly pay and deduct CPP (Canada Pension Plan) and EI (Employment Insurance) contributions, along with other payroll taxes. The received salary is fully included in the individual’s income and taxed accordingly. 

• Dividend Payments: In contrast, dividends paid by a corporation are after-tax and cannot be deducted from its income. Shareholders receiving dividends will see these amounts grossed up and will receive a dividend tax credit, the amount of which depends on the type of dividend. Some dividends may not be taxable. 

• Role of a Chartered Professional Accountant: A Chartered Professional Accountant (CPA) can assist in determining the most tax-efficient method of income distribution each year. They can also help understand the limits and regulations regarding how much can be paid out to family members, which is crucial to avoid triggering a CRA audit. 

• Complexity of Tax Act: The Canadian Tax Act is intricate, offering various ways to distribute income from a corporation. Consulting a CPA can help optimize these payouts and ensure compliance with tax laws, thereby reducing the risk of a CRA audit.