There has been much controversy as to whether one should pay themselves a salary from their professional corporation (PC) or pay no salaries and instead pay only dividends. Where one receives no salaries, they should consider the following consequences:

1. They will not be eligible to contribute into CPP and to receive CPP benefits.
2. They will not be able to deduct child care expenses if they are the lower income spouse.
3. They will not be an employee and therefore cannot have a death benefit paid to their loved one upon their passing. Death benefits up to $10,000 can be received tax free. This amount would also be tax deductible to the PC.
4. As they will not be an employee, they cannot contribute to an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA).

Much of the analysis promoting dividends only may have ignored the following issues:

1. Analysis assumed that the PC can be owned by a holding company. This is not permitted by the Royal College of Dental Surgeons of Ontario.
2. Analysis assumed that if one had RRSP’s, then all of the RRSP proceeds would be taxed at once. In most instances this is not the case as monies can be transferred to a RRIF and taken out over time, hence resulting in a tax deferral and likely also tax savings.
3. Analysis ignored the fact that the PC, especially in the case of a dentist, is quite valuable. This analysis has also ignored the issue of claiming the capital gains exemption (CGE) and the negative impact that surplus cash/investments within a PC has on claiming the CGE.

Our analysis assumed the following:

1. DDS/DMD is the sole shareholder of the PC.
2. Corporate taxable income before DDS/DMD salary is $360,000.
3. To obtain an annual after-tax cash flow of approximately $74,000, total salaries withdrawn should be $130,000 vs. dividends of $83,772.
4. CPP contribution – $4,326 per year.
5. RRSP contribution – $22,000 per year.
6. Rate of return on investments is 3.0 per cent or 5.0 per cent.
7. Remaining years of practice is 10, 20, or 30 years and the dental practice will be subsequently sold at $1 million.
8. DDS/DMD will sell shares of the PC and claim $750,000 in capital gains exemption.
9. CPP and OAS benefits are assumed to be at maximum, and DDS/DMD is to receive these benefits for 20 years following retirement at age 65.
10. RRSP is transferred into RRIF and DDS/DMD receives annual income installments from the RRIF beginning at age 65 until age 85C.
11. All investment income is realized and 100 per cent taxable.
12. EHT was not considered.

Conclusions of our analysis are as follows:

Salaries yield better results in all the above cases versus dividends.

Due to the recent decreasing corporate tax rates, the argument does make dividends more attractive today than they were in the past when the corporate tax rates were higher. However, the following issues should also be considered:

1. Contributing to an RRSP is a form of forced savings. Many clients, dentists in particular, if they are not forced to save, end up saving NIL..
2. As opposed to having all the eggs concentrated inside the PC, these eggs are spread out and diversification is obtained, i.e., spreading eggs into different baskets, which payment of salaries facilitates.

What’s Best?
If you do not believe in RRSP’s, IPP’s or RCA’s, are disciplined and can save even if not forced to do so, then consider the dividend only strategy. Otherwise, salaries may be the suitable alternative, provided your corporation’s taxable income is less than $500,000.