How Do You Remunerate Yourself From Your Own Private Corporation?

Many a times the owners of a private corporation have the dilemma of how to remunerate themselves from their corporation. There are several ways of doing so, popular methods being: dividends or salary.

Extracting funds from your corporation by way of dividend or salary have its own advantages and disadvantages. The following factors should be helpful in deciding:

• Salary is considered as an earned income for several tax rules such as RRSP (Registered Retirement Savings Plan), Child Care etc. Creation of an RRSP limit next year will create an opportunity for tax sheltering their income while providing for their retirement. When you take out salary from the corporation, it is already a tax deductible expense
• When Salary is paid it is considered as an eligible income for the purposes of child care expenses deduction on your personal tax return
• Remuneration via salary is helpful if you have your own personal mortgage coming up for renewal in the near future. This is because lenders consider salary income more stable as compared to dividend income
• Dividends on the other hand do not involve the extra cost of paying CPP (Canada Pension Plan) contributions to CRA (Canada Revenue Agency). Paying salary involves CPP contributions from both the employer and employee
• Dividends do not involve any withholding taxes and therefore are very easy to administer
• If a family member is a shareholder in the corporation, but not actively participating in its functioning, dividends are a more obvious choice because they can not be questioned by CRA, whereas salary payments must meet the criteria of reasonableness     

As you can see, there is no clear answer to the opening question. However salary deductions are a more popular choice among young entrepreneurs/owners. This is due to benefits for RRSP contributions for the future, and child care expenditure deductions.