One of the most common decisions a business owner needs to make is how to pay themselves. Many entrepreneurs decide to incorporate their business and pay themselves a salary out of their corporation. However, this often results in paying higher tax on their personal income.
One of the major advantages of being incorporated is you get the benefit and the flexibility of being able to decide how to pay yourself, paying yourself a salary isn’t your only option. If you pay yourself a salary, you must pay into CPP (Canada Pension Plan). As a result, you may end up paying more tax than if you pay yourself a dividend.
With a dividend structure, you don’t have to pay into CPP and you can leave that extra money in your corporation. We have no idea if the CPP is actually going to be there 10, 20, or 30 years from now. We also don’t know if we’re ever going to get any of it if something happens along the way. The money in the CPP is not your money; it’s a pool of money that the CRA (Canada Revenue Agency) structures and organizes.
If you have a corporation, we strongly encourage you to pay yourself a dividend to help reduce the income tax you pay as an individual, which is just one step towards taking more ownership and control over your financial future.
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If you want to effectively structure your corporation and pay yourself in a way that maximizes tax efficiency, book a call. We’d be love to run you through our full financial planning process.