Dividend Income versus Salary for Small Businesses. What is the most tax efficient?

The optimal amount to pay in salary versus dividends depends on several factors:

1.   Earned Income

It is important to have income that classifies as CPP pensionable earnings. This income is called “Earned Income”.  To maximize your future CPP pension, earned income needs to be $42,100 for 2006.  For a list of income that qualifies as “Earned Income” click here

2.   Retirement Savings

If the individual requires additional registered retirement saving contributions (RRSPs) additional “Earned Income” versus dividends is desired to allow maximum RRSP contributions.  For 2006, maximum RRSP contributions can be made with earned an income of $100,000.

3.   Corporate vs. personal tax rates  

Income flowed through a corporation and paid out in dividends to the owners is currently tax advantageous. This will fluctuate in any particular year.

In summary, many factors affect your choice of dividend versus salary paid through your corporation.  Your financial planner and tax advisor will advise you on the best salary/dividend mix in any year