How To Choose Between Salary And Dividends When Running A Small Business In BC

Deciding how to pay yourself is one of the most critical financial hurdles for business owners in British Columbia, as the choice between a salary and dividends changes your personal tax bracket, your corporate tax obligations, and your long-term retirement security.

For many BC entrepreneurs, the "right" answer isn't static; it shifts as your business grows and your lifestyle needs evolve. Choosing a salary provides stability and access to government benefits, while dividends offer flexibility and lower immediate administrative costs.

This guide will break down the complex world of owner-manager compensation to help you determine which path keeps more money in your pocket and aligns with your future goals.

Evaluate The Benefits Of A Consistent Salary Structure

Taking a salary means your corporation treats you as an employee, which involves setting up a formal payroll account with the Canada Revenue Agency (CRA).

The most significant advantage of a salary is the ability to create Registered Retirement Savings Plan (RRSP) contribution room. In BC, where the cost of living and real estate is high, building an RRSP is a powerful way to reduce your personal taxable income while saving for the future. Since RRSP room is based on earned income, dividends will not help you grow this tax-sheltered nest egg.

Furthermore, a salary requires mandatory contributions to the Canada Pension Plan (CPP). While this is an additional cost for both you and your business, it ensures you are building a government-backed pension for your retirement years.

Consider these specific advantages when leaning toward a salary:

• Earned income allows you to claim childcare expenses on your personal tax return
• Consistent pay stubs simplify personal budgeting and financial planning
• Salary is a deductible expense for your corporation, reducing its taxable income
• You avoid the risk of a large, unexpected personal tax bill at the end of the year through source deductions

While the paperwork for payroll is more intensive, the long-term benefits of social security and retirement room often outweigh the administrative burden for established business owners.

Maximize Flexibility With A Dividend Compensation Strategy

First and foremost, dividends are a distribution of a corporation’s after-tax profits to its shareholders. Because the company has already paid corporate tax on this money, you receive a dividend tax credit on your personal return to prevent double taxation.

One of the other big draws for BC small business owners is that dividends do not require CPP contributions. This can save you thousands of dollars a year in premiums, which you can then choose to reinvest into your business or manage through your own private investment portfolio.

The simplicity of dividends is also a major selling point. There is no need for monthly payroll remittances or T4 filings; you simply issue a dividend check and record it in your corporate minutes.

Dividends might be the better choice if you prioritize these factors:

• Lower immediate cash outflow due to the absence of CPP premiums
• Reduced administrative costs and simplified corporate bookkeeping
• The ability to pay yourself exactly what you need, when you need it, based on profit availability
• Lower personal tax rates on the actual dollars received compared to equivalent salary amounts

However, you must remember that dividends are not a deductible expense for the corporation. You are essentially paying yourself with "expensive" dollars that have already been touched by the small business tax rate.

Consider The Impact On Your Personal Borrowing Power

When you walk into a bank in Vancouver to discuss a business loan or a personal mortgage, the type of income you show matters. Lenders typically view a salary as "guaranteed" income. A history of consistent T4 earnings suggests stability and a lower risk profile. If you are planning to upgrade your home or invest in commercial real estate in the near future, switching to a dividend-only model could complicate your application.

Dividends are often viewed as "investment income" rather than "earned income." While most lenders will eventually accept dividend history, they usually require at least two years of consistent T3 or T5 filings to prove the income is stable. Even then, they may "gross up" or discount the income differently than they would a standard salary.

Key points to discuss with your mortgage broker include:

• How your lender treats the dividend tax credit vs. gross employment income
• The impact of CPP contributions on your total debt-service ratios
• Whether a combination of salary and dividends provides the best "on-paper" profile for high-value loans
• The necessity of having a two-year track record for non-salary compensation

For many, the slightly higher tax or CPP cost of a salary is a small price to pay for the ability to secure a low-interest mortgage in a high-priced real estate environment.

Implementing A Hybrid Approach Helps to Balance Your Goals

You do not have to choose just one. Many successful BC entrepreneurs use a hybrid compensation model to get the best of both worlds.

For example, you might pay yourself a base salary that covers your basic living expenses and maximizes your RRSP room, then issue dividends for any additional "bonus" income you want to take out of the company.

This strategy also allows for better tax planning near the end of the calendar year. If you find your personal income is lower than expected, you can issue a year-end dividend to take advantage of lower tax brackets. Alternatively, if your corporation has had an exceptional year, a mix of compensation types can help you stay below specific thresholds for the BC Employer Health Tax (EHT), which applies once your BC payroll exceeds $500,000.

A hybrid model often looks like this in practice:

• A base salary of $60,000 to $70,000 to maximize CPP and provide stable T4 income
• Supplemental dividends used to fund large one-time purchases or vacations
• Adjusting the ratio annually based on corporate profitability and personal tax changes
• Using dividends to keep your personal income within a specific tax bracket to avoid the highest marginal rates

By working closely with an accounting professional, you can fine-tune this balance every year. This ensures your compensation strategy remains as adaptive as the BC business landscape itself.

Defining Your Path To Financial Success

There is no universal winner in the debate between salary and dividends. The right choice depends on your age, your appetite for government programs like the CPP, and your immediate need for personal credit.

While dividends offer an attractive "cash-now" feel by skipping payroll taxes, the long-term tax-sheltering benefits of an RRSP-focused salary are hard to ignore for those looking at a twenty-year horizon.

So whether you are scaling a team or staying as a solo consultant, taking the time to model these scenarios will save you thousands of dollars over the life of your company.

Located in Surrey (Cloverdale), British Columbia, since 1971, HWG, Chartered Professional Accountants proudly helps clients throughout the Lower Mainland and across Canada.

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