Table of Contents
- 🧾 1. Salary vs Dividends – Why Compensation Planning Matters
- 💰 2. Salary as Shareholder Compensation
- ⚙️ 3. Payroll Process for Owner Salary
- 📈 4. Dividends as Compensation
- ⚙️ 5. How Dividends Are Paid (Process)
- 📊 6. Salary vs Dividends (Accounting View)
- 🌍 7. Dividends: Resident vs Non-Resident
- 💼 8. Paid-Up Capital (PUC) – Tax-Free Withdrawals
- 💎 9. Capital Dividend Account (CDA)
- 📊 10. Eligible vs Ineligible Dividends
- 📊 11. Example – Eligible vs Ineligible Dividends
- ⚠️ 12. TOSI Rules (Tax on Split Income)
- 🚦 13. TOSI Exceptions (When It’s Allowed)
- 📦 Final Takeaway
- 🚀 Final Insight
🧾 1. Salary vs Dividends – Why Compensation Planning Matters
When you own a corporation, one key question always comes up:
💡 “How do I take money out of my company?”
You have three main options:
- Salary 💰
- Dividends 📈
- A mix of both 🔄
👩💼 Example
Amanda owns a corporation earning $120,000
She can choose:
- Salary → $120,000
- Dividends → $120,000
- Mix → $70,000 salary + $50,000 dividends
Each choice affects:
- Corporate tax
- Personal tax
- Retirement planning
💰 2. Salary as Shareholder Compensation
Salary means you are treated as an employee of your own company.
📌 How It Works
- Corporation pays salary
- Issues T4 slip
- Deducts tax, CPP (and sometimes EI)
📊 Example
| Item | Amount |
|---|---|
| Salary | $80,000 |
| Tax + CPP deducted | ~$20,000 |
| Net received | ~$60,000 |
✅ Key Benefit
Salary is a deductible expense, so it reduces corporate tax
⚙️ 3. Payroll Process for Owner Salary
Even if you own the company, payroll rules still apply.
🧾 Steps
- Register payroll account with CRA
- Add yourself as employee
- Deduct income tax and CPP
- Remit by 15th of next month
- Issue T4 by end of February
⚠️ Important
Missing payroll remittances = penalties + interest
📈 4. Dividends as Compensation
Dividends are payments made to you as a shareholder, not employee.
📌 Key Difference
Dividends come from profits after tax
📊 Example
| Item | Amount |
|---|---|
| Corporate income | $100,000 |
| Corporate tax | $12,000 |
| Dividend paid | $88,000 |
✅ Benefits
- No CPP
- No payroll
- Simpler administration
⚙️ 5. How Dividends Are Paid (Process)
Paying dividends is simpler than salary but must follow rules.
🧾 Steps
- Decide dividend amount
- Allocate based on shares
- Pay shareholders
- Issue T5 slips
- Record in minute book
⚠️ Important Rule
Dividends must match share ownership
📊 6. Salary vs Dividends (Accounting View)
The biggest difference is how they affect corporate income.
⚖️ Comparison
| Feature | Salary | Dividend |
|---|---|---|
| Deductible | ✅ Yes | ❌ No |
| Reduces corporate tax | ✅ Yes | ❌ No |
| Paid before tax | Yes | No |
| Paid after tax | No | Yes |
💡 Example
- Salary $100K → corporate income becomes $0
- Dividend $100K → corporation still pays tax first
🌍 7. Dividends: Resident vs Non-Resident
Tax treatment depends on where the shareholder lives.
🇨🇦 Canadian Resident
- No withholding tax
- Reported on T5
🌎 Non-Resident
- 25% withholding tax (may reduce via treaty)
- Reported on NR4
📊 Example
| Type | Dividend | Tax | Cash |
|---|---|---|---|
| Resident | $10,000 | $0 | $10,000 |
| Non-resident | $10,000 | $2,500 | $7,500 |
💼 8. Paid-Up Capital (PUC) – Tax-Free Withdrawals
PUC is the original money you invested in your company.
💡 Key Idea
You can withdraw PUC tax-free
📊 Example
| Item | Amount |
|---|---|
| Investment | $100,000 |
| Withdrawal | $60,000 |
| Tax | $0 |
⚠️ Rule
You cannot withdraw more than your PUC tax-free.
💎 9. Capital Dividend Account (CDA)
CDA allows corporations to pay tax-free dividends.
💡 Where It Comes From
- Non-taxable portion of capital gains
- Life insurance proceeds
📊 Example
| Capital gain | $100,000 |
|---|---|
| Taxable | $50,000 |
| Non-taxable → CDA | $50,000 |
👉 That $50,000 can be paid tax-free
⚠️ Important
Must file Form T2054
📊 10. Eligible vs Ineligible Dividends
Not all dividends are taxed the same.
🧠 Two Types
| Type | Source | Tax |
|---|---|---|
| Ineligible | Small business income | Higher personal tax |
| Eligible | High-tax corporate income | Lower personal tax |
📌 Simple Rule
Low corporate tax → higher personal tax
High corporate tax → lower personal tax
📊 11. Example – Eligible vs Ineligible Dividends
🧾 Scenario
Corporation earns:
- $500K → small business rate
- $200K → general rate
Result
| Income | Dividend Type |
|---|---|
| First $500K | Ineligible |
| Next $200K | Eligible |
💡 Insight
Corporations track:
- LRIP → ineligible dividends
- GRIP → eligible dividends
⚠️ 12. TOSI Rules (Tax on Split Income)
TOSI prevents income splitting with family members.
🚫 Example
- Paying dividends to spouse with no involvement
- Giving shares to children just to reduce tax
❌ Result
Taxed at highest tax rate
🚦 13. TOSI Exceptions (When It’s Allowed)
Not all dividend splitting is blocked.
✅ Allowed If
- Family member works in business
- Owns significant shares
- Is actively involved
💡 Example
Spouse works full-time → dividends allowed
Child does nothing → TOSI applies
📦 Final Takeaway
🧠 What You Must Understand
- Salary = expense, reduces corporate tax 💰
- Dividends = profit distribution 📈
- PUC = tax-free capital return 💼
- CDA = tax-free dividends 💎
- Eligible vs ineligible affects personal tax 📊
- TOSI prevents unfair tax savings ⚠️
🚀 Final Insight
Corporate compensation is not just about taking money out
It is about tax planning, compliance, and strategy
If you master this topic, you can:
- Advise clients properly 💼
- Avoid CRA penalties ⚠️
- Optimize tax outcomes 📈
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