One of the most common questions dentists with
professional corporations ask is “how should I pay myself?” While there is no simple answer, in general there are three options:
1) Salaries only
2) Dividends only
3) Salaries + dividends
The three options are prerequisites to other tax breaks and supplementary tax features you may or may not value. Depending on your goals and preferences, one option may be better suited to you.
Taking a salary opens up the most number of tax breaks and features, but may also leave you with the least amount of cash in your pocket. Many of the most prominent tax breaks offered by the government require salaries. See Table 1 for details.
Only RRSP requires a significant salary to maximize the tax break. The other items can be obtained through a mix of salaries and dividends even if the salary is a small amount.
The negative of salaries are displayed on Table 2
Who Should Pay Salaries Only?
If you are a firm believer of RRSPs, you should consider a salary of at least $145,000. You can top off any additional income you require with dividends, but in many cases, if you have other low-income family members who are shareholders, it would be better to pay them dividends instead.
While it may seem counter-intuitive, the administrative burden of payroll withholdings may actually be a positive for some dentists. Being forced to take money off each pay cheque does help some dentists budget and plan their spending accordingly. Dividends, on the other hand, have no withholdings but may result in tax installments being payable. Tax installments are easy to forget about, hence salaries may be better suited for individuals who do not want to be surprised with a large tax bill at the end of the year or have not saved sufficient money for taxes.
With dividends only, you forgo the tax breaks and features we have listed. This means, no RRSP, no CPP, no childcare expenses and no employee death benefit. What you get in return is more cash in your pockets since you do not have to pay CPP or EHT (if applicable), less administrative burden and no need to justify the amounts you pay to family members.
Who Should Pay Dividends Only?
If you do not intend to contribute to RRSPs, would prefer not to contribute to CPP and do not have childcare expenses, then a dividend only strategy may be appropriate. In addition, family members who are shareholders and do not actually work or provide services for your practice should receive dividends only, if they have no other income.
Salary and Dividend Mix
This option allows you to mix and match the pros and cons of salaries and dividends. Some common salary and dividend mixes are shown on Table 3.
Paying yourself is easy, but how to do it can be a difficult decision. The decision varies significantly from dentist to dentist, from one family member to another and can change from year to year depending on your circumstances. Speak with your accountant and financial advisors to see what is best for you.
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP and Eugene Chu, BAFM, MAcc, CPA, CA of DCY Professional Corporation Chartered Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail email@example.com / firstname.lastname@example.org / email@example.com. Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.