When you own a Canadian corporation, you can choose to pay yourself through dividends, which are basically shares of the company’s profit. Here’s a simple guide to how this works and what you need to know about taxes.
What are Dividends?
Dividends are payments made to shareholders out of a corporation’s earnings. If you own a corporation, you can receive these payments based on how many shares of the company you own.
How Do Dividends Work?
- Profit Sharing: Your corporation earns profits. After paying corporate taxes, the leftover money can be shared as dividends.
- Deciding Dividends: The corporation’s board, which might just be you, decides how much of the profit to distribute as dividends. When budgeting for the upcoming year, you should first determine if you need to invest in new equipment or employees. Subtract any planned investment from last year’s net profit to figure out the amount available for dividend distribution.
- Getting Paid: Dividend distribution per shareholder is calculated based on the percentage or ratio of shares you own times the total amount available for dividends. Essentially, the more shares you have, the more dividends you’ll receive.
This approach ensures that dividends are distributed fairly and reflect each shareholder’s stake in the corporation.
Taxes on Dividends
Dividends come with a special tax treatment:
- Gross-Up: You add a percentage (gross-up) to the dividends you receive, increasing the amount you report as income.
- Tax Credit: You get a tax credit which is a reduction on your income tax, offsetting the gross-up.
Types of Dividends
- Eligible Dividends: These come from profits taxed at the general corporate rate and have a higher gross-up but also a higher tax credit, leading to lower taxes on them.
- Non-Eligible Dividends: These usually come from profits taxed at a lower rate (like small business profits) and have lower gross-up and tax credits.
Considerations
- Tax Efficiency: Dividends can be a tax-efficient way to pull money out of your corporation compared to a salary, especially if your personal income is lower, since dividends might be taxed less than a high salary.
- Corporate Earnings: The decision to pay dividends depends on the corporation’s profit; no profit means no dividends.
Note on Dividend Payments
It’s important to note that dividend payments are not treated like regular employment income when it comes to certain government programs. Specifically, dividends are not considered insurable earnings for Employment Insurance (EI) purposes, nor are they pensionable earnings for the Canada Pension Plan (CPP). This means that when you receive dividends, they do not count towards EI benefits or CPP contributions. This distinction can affect your benefits from these programs, so it’s something to keep in mind as you plan your compensation strategy.
In summary, paying yourself with dividends from your own corporation in Canada can be a smart way to manage both corporate and personal taxes. Always check the current tax rules and maybe consult a tax professional to plan effectively.
For more detailed information, you can read about taxable dividends from corporations resident in Canada on the Canada Revenue Agency’s website.
At Switzer & Co., we understand the challenges individuals and companies face. Our team of experts can help you develop a strategies and workflows that aligns with your business goals and maximizes your profits. We offer a wide range of services, including:
- Accounting and Tax
- Information Technology
- Management Consulting
With our help, you can gain peace of mind knowing that your business is prepared to weather any economic storm.
Your financial health is a critical component of your business. By implementing the above strategies and seeking professional advice, Canadian businesses can navigate these challenging times with confidence and emerge stronger on the other side. Contact our team today to learn more about our services and how we can help your business.
