Canadian Corporate Owners Compensation – Options

Friday, December 23, 2011   //   Business Taxes  //  No Comments

One of the many complex aspects of owning a corporation is how you, as the owner, decide to compensate yourself. A business owner of a corporation can get very confused with the various options open to him or her. This article will shed a little light on a complex area.

When companies usually start, the owners invest their own money. Typically, this is classified as a shareholder loan. In other words, the money is lent to the corporation by the owners to purchase supplies, equipment, furniture, etc. This money is expected to be paid back to the owners of the corporation once the corporation becomes profitable.

When the corporation starts to make money, the owners start to write cheques out of the corporate bank account for their own personal needs. A well organized business owner will write a cheque to himself/herself and deposit it into their personal bank account. Every time a cheque is written to the owners, the shareholder loan decreases. In other words, these cheques represent a repayment of the owner’s original loan.

At some point, the owner’s original loan has been paid back to them. When a Corporation reaches this point, the owners have to deal with whatever funds have been withdrawn from the corporation on their personal tax returns. This can be a very confusing moment for most corporate business owners.

There are two options that can be used to recognize this income on the owners’ personal tax return. One option is to consider the amount a salary. The other is to recognize the amount as a dividend. Each of these approaches has their own positives and negatives.

A salary is identical to payments made to any employee. Deductions for Federal Tax, CPP (Canada Pension Plan) and EI (Employment Insurance) are made every time the salary is paid (i.e. bi-weekly, semi-monthly or monthly). The net amount becomes the part that is deposited into the owner’s bank account. The deductions from the salary are submitted to the government.

The advantage of an owner receiving a salary is that the owner contributes to both CPP and sometimes EI. This allows the owner to take advantage of these programs in the future. It also provides the owner with RRSP contribution room that can be used in the next year. The salary also becomes an expense in the corporation so the corporate tax amount owed is lower. The repeat nature of the salary provides a stable source of funds to the owner to pay their personal expenses and provides a steady remittance to the government of the taxes that eventually will have to be paid.

About the only disadvantage of the salary strategy for a business owner is the fact that it is difficult to maintain if the corporation does not have a steady source of cash. In other words, the salary to the owner will require the payment of the source deductions by the middle of the next month. If a corporation has a slow month, this can be difficult.

The other approach that is used to recognize the money paid to an owner is to issue dividends. Dividends are typically declared at the end of the year and represent the amount of money that has been taken out of the corporation by the owner. Unlike salaries, dividends do not result in payments to either the CPP program or the EI program. There is also no immediate need to submit source deductions or taxes to the government. Instead, the money is owed when the individual does their Personal Tax Return in April of the following year. So the upside to dividends is more flexibility in paying the taxes.

It should also be noted that taking salary instead of dividends or dividends instead of salary does not really change the amount of tax that is paid. In the case of salaries, the money is taxed entirely in the hands of the owner and is not taxed inside the corporation. Dividends, on the other hand, are taxed first inside the corporation and then again on the owner’s personal tax return. The tax system, though, ensures that the total tax of the dividend approach is pretty much the same as the salary approach.

Corporate business owners eventually will have to face the dilemma of declaring either a salary or a dividend. Both of these approaches result in pretty much the same amount of tax being paid. Which approach an owner uses will depend on the owner’s philosophy and cash flow situation.
By Gerald E Hunt


Gerald Hunt B.Sc. MBA is a small business accountant. He is the owner of the Padgett Business Services® franchise in Southeast Calgary and Okotoks. Padgett Business Services® provides bookkeeping, accounting and tax services to small owner operated businesses. Sign up for the Small Biz Builder Newsletter for informative tax and accounting tips at

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