Kickstart Your Corporation

Chapter 2The Compensation Decision: Salary or Dividends?

Let's say it's a new tax year, and you're marking the start of it by asking yourself a question:

• Should I pay myself a salary, should I pay myself in dividends, or should I do some combination of both?

In looking for answers to this question, there's no shortage of opinions. Your accountant may tell you one thing, your colleagues are all doing different things, advice from the big banks and accounting firms are different, and there are even articles in the mainstream financial papers—such as the Globe and Mail and the Financial Post—that completely contradict each other. What's the right advice for you?

What You'll Get Out of This Chapter

One of the biggest and most important questions you'll face as an incorporated professional or business owner is around your personal compensation.

If the corporation earns income (and not you personally, as if you were an employee), somehow that income has to move from the corporation to you—and you have a choice about how that happens.

Depending on which compensation option you select—salary, dividends, or a mix of both—you'll face different tax issues both while you're working and in retirement.

How do you decide which of the possible compensation options is the best fit for your personal situation? This chapter runs through the implications of each choice, with some examples to illustrate the impacts of different options. By the end, you should have a basic understanding of ...