Wage vs Dividends Planning
This strategy involves paying the owner-manager a combination of salary and dividends to optimize their personal tax situation and minimize the overall tax burden.
Salary/wages:
- Considered a deductible business expense, reducing th corporation’s taxable income.
- Contributes to the Canada Pension Plan (CPP) and may increase future CPP benefits for the owner-manager.
- Allows for personal RRSP contribution room, potentially providing additional tax savings
Dividends:
- Not deductible as a business expense, but taxed at a lower personal rate due to the Dividend Tax Credit.
- No CPP contributions required, which could result in short-term cash flow savings.
- No impact on RRSP contribution room
Why annual review by an accountant is necessary:
Changing tax rates: Personal and corporate tax rates change periodically, which may affect the optimal mix of salary and dividends for an owner-manager.
Business profitability: The company’s profitability may fluctuate, affecting the amount of dividends that can be paid and the optimal compensation mix.
Personal financial situation: The owner-manager’s personal financial situation may change (e.g., increased personal expenses, changes in family size, or investment opportunities), which could impact the ideal salary and dividend mix.
Retirement planning: As the owner-manager approaches retirement, it may be beneficial to adjust the mix of salary and dividends to maximize retirement benefits, such as CPP and RRSP contributions.
Tax planning opportunities: An accountant can help identify additional tax planning opportunities, such as income splitting with family members, using a holding company, or implementing other tax-saving strategies.
In conclusion, the wage vs dividends planning strategy for a salon business in Canada should be reviewed annually by an accountant to ensure the owner-manager’s compensation mix is optimized for their specific situation and takes advantage of any changes in tax laws or personal circumstances.