An individual shareholder of a corporation may be remunerated through employment income (salary), dividends or a combination of both. According to the concept of integration provided for in tax legislation, the combined total of taxes on the income of the individual and his or her corporation should be similar, regardless of the method of remuneration chosen. However, there are a number of other factors that should be taken into account when determining such compensation. Here is a summary analysis.
Shareholder’s employment income
To receive employment income, a shareholder must render services to the company.
An investor shareholder or a spouse shareholder not involved in the company is not eligible to receive a salary.
Factors favoring the payment of a salary
The payment of a salary is a deductible expense for the corporation, and therefore reduces the corporation’s taxable income. In some cases, the salary paid to the shareholder can reduce taxable income below the threshold eligible for the small business deduction.
Paying a salary allows you to contribute to the Régie des rentes du Québec, thereby benefiting from the protections offered by this plan, i.e. basic financial protection at retirement or in the event of disability. Since the first $3,500 of salary is exempt from QPP contributions, a shareholder should pay himself a salary of at least this amount to receive a pension while minimizing his contributions.
The salary is used to contribute to the Quebec Parental Insurance Plan (QPIP). If the shareholder plans to expand his or her family, he or she will be entitled to benefits under this Plan if he or she contributes to it.
The child care expense deduction can be claimed at the federal level only if both parents earn employment income. Assuming the spouse earns employment income, the couple would not be entitled to this deduction if the shareholder does not earn a salary.
The shareholder will be able to contribute to an RRSP, since employment income is included in earned income for the purposes of calculating the RRSP contribution limit (but not dividend income).
The payment of a salary enables the company to set up an individual pension scheme.
A minority shareholder can count the hours worked to reach the 5,500-hour threshold for the company to benefit from the small business deduction for provincial taxes. This salary must be at least equivalent to the minimum wage.
Factors favoring dividend payments
The tax rate on dividend income is lower than the tax rate on employment income. If the company has a balance in its General Rate Income Account (GRIP), it can pay an eligible dividend at a tax rate lower than the tax rate on an ordinary dividend.
The payment of a dividend allows income splitting with a spouse without having to perform a reasonableness test under certain other strict conditions.
The company limits employer contributions (RRQ, RQAP, CNESST, FSS, CNT, FDRCMO) by paying no salary to a shareholder.
A shareholder holding more than 40% of a company’s shares does not have to contribute to employment insurance if he pays himself a salary.
As a result of the basic credit and the dividend credit, a single shareholder whose only income is $35,000 in ordinary dividend income would have paid $243 in federal tax and $2,240 in provincial tax in 2022, for a combined tax rate of 7%.
Note that if the company has a balance in its capital dividend account, it is always preferable to pay a capital dividend to the shareholder, as this dividend is not taxable.
There is no universal answer
The decision to pay a salary, a dividend or a combination of the two depends on the situation of the shareholder and his or her company. It’s best to consult a specialist for personalized advice, to ensure that you make the right decision for your situation.
An article by Mathieu Gélinas, tax advisor
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