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Wages or dividends: what is best?

By Gord Ahier |

Carla asked:

As the owner of a small business in Alberta, am I better off to pay myself a wage or to take dividends from the company? What is the tax rate difference between dividend income and taking a wage from thecompany?

Gord Ahier answered:

The taxation of corporate and personal income in Canada is designed to be integrated. In other words, you should be more or less indifferent between taking your income as a wage from your corporation as opposed to receiving the income as a dividend. That being said, the system does not work seamlessly.

Assuming you have a small business (a Canadian Controlled Private Company) and the income is less than $500,000, in 2011 in the Province of Alberta, if your company earned $1000 of business income the following results could be obtained:

1. If this was paid to you personally as a wage at the top tax rate you would have a net in your pocket after tax of $610.
2. If the company first paid tax and then you received the balance as a dividend, you would have a net in your pocket after tax of $621.

The decision to pay a wage versus a dividend should be discussed with your accountant. There are a number of other factors that will need to be considered to determine the best decision for you. The numbers provided assume you are in the top personal tax bracket. Accordingly, you will need to consider such things as, your level of personal income, whether you should be contributing to Canada Pension Plan, the ability to make registered retirement savings plan contributions and whether your company is involved in scientific research and experimental development to name a few

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