Since the upheaval caused by changes to the incorporation rules in 2018 and 2019, many incorporated professionals have had to review the use of their corporation as part of their professional activities.
Some rules are more restrictive, or no longer provide the same benefits as before.
A multifaceted decision
We issued a number of communications concerning this reform when it was announced so that you could adapt to the changes quickly and efficiently.
Today we return to the question of the choice of compensation that an incorporated professional must make. If this is your case, you already know that you have two options: compensation in salary or dividends. The choice of compensation must be analyzed in depth to determine the real benefits that one option may have over the other in your situation.
Salary and tax deductions
If you are a shareholder in your business, you can receive a salary and periodic bonuses, like all other employees. This salary is a tax deductible expense for your corporation and therefore lowers its taxable income.
Your corporation must make deductions at source from your salary, including contributions to the Canada and Quebec pension plans. However, you will be able to receive a pension from these plans when you retire. In addition, your salary enables you to accumulate RRSP contribution room, which in turn allows you to contribute additional amounts to this registered plan and to claim an equivalent tax deduction.
Dividends: eligible or non-eligible?
You can also pay yourself in the form of eligible or non-eligible dividends, which are paid out of the corporation’s retained earnings. For personal income tax purposes, an eligible dividend is taxed at a lower tax rate than a non-eligible dividend. However, it should be noted that the ability of a corporation to pay eligible dividends essentially depends on its status.
You should also know that, if your source of income is solely from the payment of dividends, you are eligible for a non-refundable dividend tax credit. However, you do not accumulate any RRSP contribution room and you do not contribute to the Canada or Quebec pension plans, for which you are therefore not eligible.
Bonus
If you are the shareholder-manager of your corporation and you wish to increase your compensation, you can pay yourself a bonus. Like salary, the payment of a bonus is subject to deductions at source.
Your corporation can deduct this bonus in the fiscal year in which it is paid, if it is declared before the end of its fiscal year and paid no later than the 180th day after the end of this fiscal year. This way, although your corporation declares a bonus no later than December 31, you can defer its taxation if you don’t receive it until the start of the following year.
A winning combination
Often, a salary-dividend combination turns out to be the most tax-efficient, since you can reap the benefits of each option.
The question of compensation in salary or dividends is complex, however, and requires an in-depth analysis of your financial situation and that of your corporation. To make the best decisions, turn to experts who know your profession and who can recommend a plan suited to your needs. At fdp, we offer you intelligent financial guidance tailored to your profession and your goals.
Anik Bougie, LL.M. Fisc., F. Pl., TEP
Practice Leader, Financial Planning and Taxation
