• Last Updated:
  • Mar 13th, 2018 11:44 pm
[OP]
Newbie
Mar 16, 2017
15 posts

Salary vs Dividends

Hi, I have a few employees under my company and they're also shareholders. I have always been paying them salary in the past but can I make a change and pay them dividends instead? Given there's no change in their job duties, would CRA mind if I make a sudden switch to pay them dividends instead of salaries?

thanks!!
10 replies
Deal Guru
Aug 2, 2010
12534 posts
3071 upvotes
Here 'n There
CRA doesn't care. Dividends are taxable too.
Newbie
Dec 23, 2017
17 posts
6 upvotes
it's better to pay dividends because you avoid having to pay into CPP/EI. I don't think it would matter to CRA if you suddenly switched but you need to confirm if they are holding the same class of shares as you. If they are, then the payouts have to be equal to the proportion of shares you they own.
[OP]
Newbie
Mar 16, 2017
15 posts
Thank you limoncello! They hold a different share class so I assume the payouts dont have to be equal to mine, but theirs will be equal to each other I suppose...
Deal Addict
Feb 5, 2009
2564 posts
707 upvotes
Newmarket
Unfortunately it is 2018 and the answer is not as simple as it was in the past. With the new changes your ability to pay dividends will depend on the age of the shareholders, the industry you are in, percentage of shares they hold, their actual involvement in the business and there are other check to be done depending on your situation.
[OP]
Newbie
Mar 16, 2017
15 posts
Thanks for your input Homerhomer! Do you know if one has to be actively involved in the business operations to be eligible to receive dividends?
Deal Addict
Feb 5, 2009
2564 posts
707 upvotes
Newmarket
mazhanlv wrote:
Mar 8th, 2018 8:43 pm
Thanks for your input Homerhomer! Do you know if one has to be actively involved in the business operations to be eligible to receive dividends?
Depends ;-)
Since there are many variables I would suggest you read up on the subject, see what applies to you and then ask questions while giving more details of your situation.

https://www.canada.ca/en/revenue-agency ... dults.html
http://www.advisor.ca/tax/tax-news/feds ... sal-246986
Newbie
Mar 30, 2016
58 posts
28 upvotes
Although the guidelines can be confusing, if the person you are paying is receiving a reasonable pay for the work they preform the income splitting changes shouldn't have an effect. The rules are focused on individuals who don't contribute at all. If you were just subbing a part time employees cheque with dividends it would likely be fine especially if they are arms length.
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Deal Addict
Feb 25, 2007
1077 posts
495 upvotes
Ottawa
Maybe you're doing this already, but think through the implications for the employees, too.
It's easy to see this as an attractive way to jointly "save" on EI premiums and CPP/QPP, calculating the right dividend level to keep your company and them personally tax-neutral on corporate and personal income taxes.

However, if they are more like "real" employees, EI may be valuable to them. And CPP benefits are not negligible and you need to build up a contribution history over time.

Putting that aside, if your employees' current salary is pretty high, they'll at first feel they're getting *more*, but then they need to pay tax on the dividends later. And may be stuck paying tax by instalments in later years.
Example (ignoring EI and CPP): Jane currently gets a $5k/month ($60k/yr) pre-tax salary, your company withholds an appropriate amount ($1k/mo) for her personal income tax, and pays her $4k/mo. If she has no other income, and no special deductions/tax credits, she'll end up owing no additional personal income tax. Now you'll pay her $4250/mo in dividends (=$51k per year, which is the same as the original $60k minus the 15%=$9k corporate tax saving you got by deducting her employment income as a business expense). Yay, she's getting more on each paycheque, but when she does her personal income taxes, dividend gross-up and tax credit will mean she'll have to pay $3k tax on filing. And may need to pay in instalments the next year. She and you will work out even, but she may not be thrilled with the extra budgeting and admin she needs to do.

If their salary is lower, it gets weirder. If Andy currently gets a pre-tax salary of $2k/mo ($24k), he pays an average personal tax rate of about 10% on income, so after tax withholding you'll pay him about $1800/mo. For you to stay whole if you switch him to dividends, you can only pay him $2k/mo -15% (for your corporate taxes) = $1700/mo. If he has no other income, he'll owe no income tax - hurrah! - but he'll still probably prefer the missing $100/mo! (He may get it back if he has other income that is taxed....)

Bottom line is that paying dividends instead of salary is a great thing to optimize if it's all coming coming in and out from one pocket, i.e. your employees are not arm's length, which is also where the regulation is getting a bit stricter (though as @ardonn writes you may be fine). If you have arm's length parties with their own individual interests, it can still make sense if all of you think EI and CPP is a waste of money and so avoiding those deductions gives a "windfall" you can spread around to make everyone more than whole. But otherwise, there is no free lunch.
Newbie
Jan 30, 2013
57 posts
17 upvotes
mazhanlv wrote:
Mar 7th, 2018 4:19 pm
Hi, I have a few employees under my company and they're also shareholders.
- Minority Shareholders? LOL. You gotta make them feel better than calling them employees.
mazhanlv wrote:
Mar 7th, 2018 4:19 pm
can I make a change and pay them dividends instead?
- One is before tax expense (salary) and the other one is after tax payment (dividends).
- Salary also involved with deductibles (EI, CPP and Income Tax) and employer portion on EI and CPP.
- Have you thought about paying all of them as contractor? let them deal with the taxation, if this is what you are getting at?
Deal Addict
User avatar
Aug 15, 2015
1105 posts
147 upvotes
Markham, ON
Are you going to have a proper discussion with you employee and shareholder about what you are thinking?

Don't treat them like children and make all decisions for them without talking to them at all. And then give them some useless paper with hardly any information or some information that only a professional accountant will think is easy to understand or easy to question.

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