Owner- manager compensation

Question 1

Owner- manager compensation – salary vs. dividends (Taxation)

Answer 1

• Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary
• The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration
• Salary payments are deductible to the corporation whereas dividends are not
• Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid
• Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
• Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments
• Dividend payments will reduce an individual’s cumulative net investment loss (CNIL)

Reference: ITA 18(1)(a), 121, 146