As a Saskatchewan business owner, one of the most important decisions you’ll need to make is whether to take dividends or salary as compensation. Each option has pros and cons; we’ll explore a few to help you make an informed decision.
Pros of Taking Dividends
- Tax efficiency: Dividends can be taxed at a lower rate than salary, which means you may pay less in taxes overall. This used to be a given, but since some tax changes, this is not always the case.
- Flexibility: Unlike salary, which is subject to payroll taxes and other deductions, dividends can be paid out at any time and in any amount, giving you flexibility in managing your cash flow and adjusting your income as needed.
- Retained earnings: By paying yourself dividends instead of a salary, you can leave more money in the business to reinvest in growth opportunities or pay down debt.
Cons of Taking Dividends
- Limited contribution room: Unlike salary, which can be used to contribute to retirement savings plans like RRSPs and TFSAs, dividends have limited contribution room. Taking dividends can limit your ability to save for retirement or other long-term goals.
- Income stability: Their flexibility can also be a downside; you may experience fluctuations in your income from year to year. This can make it difficult to budget and plan for your personal finances.
- Reduced access to lending. Banks and Credit Unions typically prefer to see salary over dividend income for lending applications.
Pros of Taking Salary
- Consistent income: By paying yourself a salary, you’ll have a consistent stream of income that can be easier to budget and plan for, providing greater stability and peace of mind.
- Retirement savings: As mentioned earlier, salary can be used to contribute to retirement savings plans like IPPs, RRSPs and TFSAs, helping you save for retirement and reduce your tax burden now.
- Typical access to lending. Banks and Credit Unions typically prefer to see salary over dividend income for lending applications.
Cons of Taking Salary
- Other deductions: Salary is subject to payroll taxes and other deductions, which can result in higher overall tax payments, which can reduce your take-home pay and limit your ability to invest in the business.
- Less flexibility: Unlike dividends, which can be paid out at any time and in any amount, salary is subject to regular payroll schedules and other constraints. This can make it harder to adjust your income or manage your cash flow.
- Limited retained earnings: By paying yourself a salary, you could be taking money out of the business that could otherwise be reinvested in growth opportunities or used to pay down debt.
Like anything, there are pros and cons to taking dividends and salary as a Saskatchewan business owner. Ultimately, the best approach depends on your financial goals, cash flow needs, and long-term business objectives. This often ends up with a mix of both, typically maximizing tax deferral opportunities with salary and utilizing the added flexibility and tax treatment of notional accounts with dividends.
