Personal Finance

Contractors - T1 or T4?

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  • Oct 15th, 2018 6:13 pm
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[OP]
Member
Oct 12, 2016
223 posts
35 upvotes

Contractors - T1 or T4?

Hello folks.

Those of you who are contractors or have experience of contracting through incorporated companies, how do/did you pay yourselves. Do you prefer a salary or dividend? I know with the latter you don't have to pay CPP. But generally speaking, which one works out better in terms of tax savings?

I am specifically interested in finding out views of people who often switch between "full-time" and contracting.

Thanks.
3 replies
Jr. Member
Mar 6, 2015
115 posts
48 upvotes
In short, the Canadian tax system is designed so an individual should be indifferent between earning income through a Canadian corporation by salary or dividend. This is essentially the concept of integration. There's plenty of information you can read online about it, a google search will guide you.

There are other points to consider when deciding on how to pay yourself. For example, taking a salary increases your RRSP contribution room, whereas a dividend does not. But if it's pure tax minimization, you should be indifferent between taking salaries or dividends.
Sr. Member
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Feb 14, 2009
990 posts
330 upvotes
Limited7 wrote:
Oct 12th, 2018 10:58 am
Hello folks.

Those of you who are contractors or have experience of contracting through incorporated companies, how do/did you pay yourselves. Do you prefer a salary or dividend? I know with the latter you don't have to pay CPP. But generally speaking, which one works out better in terms of tax savings?

I am specifically interested in finding out views of people who often switch between "full-time" and contracting.

Thanks.
MTLCPA already provided main answer --- in most cases it will be the same.
But in every concrete situation there are many considerations.

Lets talk simple semi-qualitative mathematics:
Salary: On business side -- (relatively) minor contributions
On personal side, taxes (and contributions) go progressively from zero to >50%
Dividends: average flat tax on business side and average progressive tax on personal side.
If we plug in realistic (still very approximate) marginal tax values, then:

1. first 15K. It is better goes salary way-- almost zero tax on personal and business sides.
2. second 15K : 20% salary tax vs. 15% business dividends tax plus 10% personal dividends tax -- still salary better
3. next 20K: 30% salary tax vs. 15% business + 20% personal dividends tax -- still salary better
4. next 50K: 45% salary tax vs 15% business + 25% personal dividends tax -- now dividends look better

Calculation above depend on province tax rates, family situation, business type , etc, etc.

On top of all exact mathematics that has to be done separately in each case,
there are several other consideration: RRSP and pension contributions,
salary is good for getting mortgage but dividends not, salary can help to
get preferable SMB status, etc....

Cheers!
Deal Addict
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Mar 9, 2012
1639 posts
631 upvotes
Kitchener
Limited7 wrote:
Oct 12th, 2018 10:58 am
Hello folks.

Those of you who are contractors or have experience of contracting through incorporated companies, how do/did you pay yourselves. Do you prefer a salary or dividend? I know with the latter you don't have to pay CPP. But generally speaking, which one works out better in terms of tax savings?

I am specifically interested in finding out views of people who often switch between "full-time" and contracting.

Thanks.
It's starting to become a 'depends' issue. I do some side-work and I've started to receive T4-A's. It's marked as "other income", and that's my self-employment part. I believe it was legislated in not too long ago (like for the 2016 tax year), this was the current government that did this.

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